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Sensitivity analysis
A probability weighted average of all possible outcomes. Analysis that allows the financial manager to simultaneously consider the effects of changes in the estimates of multiple value drivers on the investment opportunitys NPV. The process of determining how the distribution of possible net present values or internal rates of return for a particular project is affected by a change in one particular value driver. The process of imitating the performance of a risky investment project through repeated evaluations, usually using a computer. This type of experimentation is designed to capture the critical realities of the decision-making situation. The primary determinants of an investments cash flow and its performance (e.g. number of units sold, cost per unit to produce. A type of analysis to determine the level of sales necessary to cover total operating cost and produce a zero level of Net Operating Income or EBIT. A type of analysis used to identify the level of sales needed to meet the costs associated with a project. The level of sales that covers total cash operating cost ( specifically excluding consideration for depreciation expense). The difference between the selling price per unit and the variable cost per unit. The percentage change in NOI caused by a percentage changes in sales. Variable cost. Costs that do not vary with the level of sales or output, including both cash fixed cost ( or fixed operating cost before depreciation) and depreciation. Fixed cost. A type of analysis used to identify the level of sales necessary to produce a zero level of NPV. The inclusion of fixed operating costs in a firms cost structure that magnify the effect of changes in revenues on the firms net operating income. Cost that change with the level of sales or output. Opportunities that allow for the alteration of the projects cash flow stream while the project is being operated (e.g. changing the product mix, level or output, or the mix of inputs). The discount rate that is used to calculate the firms overall value. The rate of return the firm must earn in order to satisfy the requirements of its common stockholders. A composite of the individual costs of financing incurred by each capital source. A firms weighted cost capital is a function of (1) the individual cost of capital, (2) the capital structure mix, and (3) the level of financing necessary to make the investment. The rate that has to be received from an investment in order to achieve the required rate of return for the creditors. This rate must be adjusted for the fact that an increase in interest payments will result in lower taxes. The cost is based on the debtholders opportunity cost of debt in the capital markets. The rate of return that must be earned on the preferred stockholders investment in order to satisfy their required rate of return. The cost is based on the preferred stockholders opportunity cost of preferred stock in the capital markets. The cost of capital for a specific business unit or division. The transaction cost incurred when a firm raises funds by issuing a particular type of security.
Accounting break-even analysis Break-even analysis Cash break-even point Contribution margin Degree of operating leverage Direct cost Fixed cost Indirect cost NPV break-even analysis Operating Leverage Variable cost Real options Cost of capital Cost of common equity Weighted average cost of capital (WACC)
Cost of debt
The ratio of short- plus long term debt divided by the value of the firms debt plus equity. When the firms investments earn a rate of return (before taxes) that is greater than the cost of borrowing, this results in higher EPS and a higher rate of return on the firms common equity.
6. Agency Costs
7. Financial distress costs 8. Interest tax savings 9. Internal Sources of Financing 10. Benchmarking
11. EBITDA Coverage Ratio 12. EBIT-EPS chart 13. EBIT-EPS indifference point 14. Financial leverage effect 15. Interest- Bearing Debt Ratio 16. Range of earnings chart 17. Cash Dividend 18. Date of record 19. Declaration date 20. Dividend payout ratio 21. Dividend policy 22. Ex- dividend ratio
The mix of sources of financing used by the firm to finance its assets. The mix of financing sources in the capital structure that maximizes shareholder value. When the firms investments earn a rate of return (before taxes) that is less than the cost of borrowing, this results in lower EPS and a lower rate of return on the firms common equity. The costs incurred by a firms common stockholders when the firms management makes decisions that are not in the shareholders best interest but instead further the interests of management of the firm. The costs incurred by a firm that cannot pay its bills (including principal and interest on debt) in a timely manner. The reduction in income tax resulting due to the tax deductibility of interest expense. The retention and reinvestment of firm earnings in the firm. Comparing the firms current and proposed capital structures to a set of firms that are considered to be in similar lines of business and consequently subject to the same types of risk. The ratio of the sum of EBIT plus depreciation expense divided by interest plus annual before-tax principal payments. Graphic representation of the relationship between EPS and the level of firm EBIT. The level of EBIT which produces the same level of EPS for two different capital structures. The use of debt financing in a firms capital structure which increases firm EPS when leverage is favorable and reduces EPS when leverage is unfavorable. The ratio of interest-bearing debt to total assets. Same as EPS-EBIT chart Cash paid directly to stockholders The date on which the company looks at its records to see who receives dividends. The date on which the company looks at its records to see who receives dividends. The total dollar amount of dividends relative to the companys net income. The firms policy that determines how much cash it will distribute to its shareholders and when these distributions will be made. The date upon which stock brokerage companies have uniformly decided to terminate the right of ownership to the dividend, which is two days prior to the date of record. A method of repurchasing the firms stock whereby the firm acquires the stock on the market, often buying a relatively small number of shares every day, at the going market price. The date on which the company mails a dividend check to each investor of record Also called a stock buyback, the repurchase of common stock by the issuing firm for any of a variety of reasons, resulting in the reduction of shares outstanding. The distribution of shares of up to 25% of the number of shares currently standing, issued on a pro data basis to the currently outstanding. A stock dividend exceeding 25% of the number of shares currently outstanding. A formal offer by the company to buy a specified number of shares at a predetermined and stated price. A plan for a future period that details the sources of cash a firm anticipates receiving and the amounts and timing of cash it plans to spend. A detailed estimate of a firms sources and uses of financing for a period that extends three to five years into the future. A forecast of a firms sources of cash and planned uses of cash spanning the next twelve months. A general description of the firm, its products and services, and how it plans to compete with other firms in order to sell those products and services. The total amount of financing a firms estimate that it will need for a future period that will not be funded through the retention of earnings or by increases in the firms
24. Payment date 25. Share or stock repurchase 26. Stock dividend 27. Stock split 28. Tender offer
29.Cash budget 30. Long-term financial plan 31. Short-term financial plan 32. Strategic Plan 33. Discretionary Financing needs (DFN)
34. Discretionary sources of financing 35. Percent of sales method 36. Pro forma balance sheet 37. Pro forma income statement 38. Sources of spontaneous financing 39. Permanent Investments 40. Permanent sources of financing 41. Principle of self-liquidating debt
accounts payable and accrued expenses. Sources of financing that require explicit action by the firms management. A financial forecasting technique that uses the proportion of the item being forecast to the level of firm sales as the basis for predicting the future level of item. A forecast of each of the elements of a firms balance sheet. A forecast of each of the elements of a firms income statement. Sources of financing that arise automatically out of changes in the firms sales. Investments in assets that the firm expects to hold for a period longer than one year. A source of financing that is expected to be used by the firm for an extended period of time such as an intermediate-term loan, bonds, or common equity. A guiding rule of thumb for managing firm liquidity that calls for financing permanent investments in assets with permanent sources of financing, and temporary investments with temporary sources of financing. Financing sources that arise naturally out of the course of doing business and which do not call for an explicit financing decision each time the firm uses it. Current assets that will be liquidated and not replaced within the current year, including cash and marketable securities, accounts receivables, and seasonal fluctuations in inventories. Typically those consist of current liabilities the firm incurs on a discretionary basis. A type of account payable that arises when one firm provides goods or services to a customer with an agreement to bill them later. The average period of time the firm uses to repay its trade creditors. The operating cycle less the accounts payable deferral periods. The number of days a firm uses to convert its inventory into cash or accounts receivables following a sale. The period of time that elapses from the time the firm acquires an item of inventory until that item has been sold and cash has been collected. An unsecured short-term bank credit made for a specific purpose. A money-market security with a mature of one to 270 days, issued by large banks and corporations, and that is backed by the issuing firms promise to pay the face amount on the maturity date specified on the note. A financial institution that purchases accounts receivable from firms. An informal agreement or understanding between the borrower and the bank about the maximum amount of credit that the bank will provide the borrower at any one time. Loans that involve the pledge of specific assets as collateral in the event the borrower defaults in payment of principal or interest. Debts of the company that is due and payable within a period of one year and which are secured only by the promise of the firm to repay the debt. A numerical evaluation of the credit worthiness of an individual borrower based on the borrowers current debts and history of making payments in a timely basis. The amount of the difference between the cash balance shown on a firms books and the available balance at the firms bank. The control of the firms store of assets that are to be sold in the normal course of the firms operations. Short-term, low risk debt instruments that can be sold easily and with very low risk of loss. The time period until payment must be made, any discount for early payment, the quality of customer who is to receive credit, and the collection efforts put forth by the firm to collect its delinquent accounts.
44. Temporary sources of financing 45. Trade credit 46. Accounts payable deferral period 47. Cash conversion cycle 48. Inventory conversion period 49. Operating Cycle 50. Bank transaction loan 51. Commercial paper
54. Secured current liabilities 55. Unsecured current liabilities 56. Credit scoring 57. Float 58. Inventory management 59. Money-market securities 60. Term of sale
Bid-asked rate Bid rate Buying rate Cross rate Delivery rate Direct quote Exchange rate Exchange rate risk Foreign exchange (FX) market Forward exchange contract Forward exchange rate Forward spot differential Indirect quote Simple arbitrage Spot exchange rate Interest rate parity International Fisher Effect Law of one price Purchasing-power parity Direct foreign investment Multinational corporation Political risk Risk profile Insurance
The process of buying and selling in more than one market to make riskless profits The rate a bank or foreign exchange trader asks the customer to pay in home currency for foreign currency when the bank is selling and the customer is buying. Also known as the selling rate. The difference between the bid quote and ask price quote. The rate at which the bank buys the foreign currency from the customer by paying in its home currency. It is also known as the buying rate. Same as the bid rate. The computation of an exchange rate for a currency from the exchange rates of two other currencies. The future date on which the actual payment of one currency in exchange for another takes place in a foreign exchange transaction. The exchange rate that indicates the number of units of the home currency required to buy one unit of a foreign currency. The price of a foreign currency stated in terms of the domestic or home currency The risk that tomorrows exchange rate will differ from todays rate. The market in which the currencies of various countries are traded. A contract that requires delivery on a specified future date of one currency in return for a specified amount of another currency. The exchange rate agreed upon today for the delivery of currency at a future date. The difference (premium or discount) between the forward and spot currency exchange rates for a countrys currency. The exchange rate that expresses the number of units of foreign currency that can be bought for one unit of home currency Trading to eliminate exchange rate differentials across the markets for a single currency. The ratio of a home currency and foreign currency in which the transaction calls for immediate delivery. A theory that relates interest rates in two countries to the exchange rate of their currencies. A theory that states real rates of return are the same across the world, with the difference in returns across the world resulting from different inflation rates. An economic principle that states that a good or service cannot sell for different prices in the same market. A theory that states that exchange rates adjust so that identical goods cost the same amount regardless of where in the world they are purchased. When a company from one country makes a physical investment such as building a factory in another country. A company that has control over direct foreign investments in more than one country. The potential for losses that can occur when investing in foreign countries where political decisions can result in losses of property. The concept of a firms appetite for assuming risk A contract that involves compensation for specific potential future losses in exchange for periodic payments and that provides for the transfer of the risk of a loss, from one entity to another, in exchange for a premium. A risk management approach where the entity sets aside a sum of money as protection against potential future loss rather than purchasing an insurance policy. The risk of loss as a result of default on a financial obligation also referred to as default risk. A strategy designed to minimize exposure to unwanted risk by taking a position in one market that offsets exposure to price fluctuations in an opposite position in another market. A term used to refer the ownership of a security, contract, or commodity. A term used to refer to the fact that you have sold a security, contract, or commodity. An exchange in which the buyer agrees to purchase something and the seller agrees to sell it for a specified price, and the exchange is completed at the same time.
American Option Basis risk Call option Commodity futures Derivative contract European option Exercise price Financial futures
Futures contract Futures margin Marking to market Option contract Option expiration date Option premium Option writing Put option Strike price
An option that may be exercised at any time up through the contracts expiration date. Risk associated with imperfect hedging that arises because the asset underlying the futures contract is not identical to the asset that underlies the firms risk exposure. A contract that gives its holder the right to purchase a given number of shares of stock or some other asset at a specified price over a given period of time. A contract to buy or sell a stated commodity at a specified price and at a specified price over a given time period. A security whose value is derived from the value of another asset or security. An option that can only be exercised on its expiration date. The price at which the stock or asset may be purchased from the option writer in the case of a call, or sold to the option writer in the case of a put. A contract to buy or sell an underlying asset such as Treasury securities, certificates of deposit. Eurodollars, foreign currencies, or stock indices at a specified price at some future specified time. A contract to buy or sell a stated commodity or financial claim at a specified price at some future specified time. The amount of money or collateral that must be provided to control credit or default risk on a futures; this margin is required to prevent default. Transferring daily gains or losses from a firms futures contracts to or from its margin account. The right, but not the obligation, to buy or sell something at a specified price and within a specified period of time. The date on which the option contract expires. The price paid for an option. The process of selling puts and calls An option that gives its owner the right to sell a given number of shares of common stock or an asset at specified price within a given period. The price at which the stock or asset may be purchased from the option writer in the case of a call, or sold to the option writer in the case of a put; also called the exercise price. The exchange or trading of debt obligations whose payments are denominated in different currencies The swapping or trading between two companies of fixed interest payments for variable or floating rate interest payments. The nominal or face amount on a swap agreement. An agreement in which two parties agree to exchange one set of payments for another.