Goal of The Firm
To create value for its shareholders .. "maximization of shareholder wealth" (Chapter 1)
Sole Proprietorship
A business owned by a single individual (Chapter 1)
General Partnership
A partnership in which all partners are fully liable for the indebtedness incurred by the partnership (Chapter 1)
Limited Partnership
A partnership in which one or more of the partners has limited liability, restricted to the amount of capital he or she invests in the partnership (Chapter 1)
Corporation
An equity that legally functions separate and apart from its owners (Chapter 1)
S Corporation
A corporation that, because of specific qualifications, is taxed as though it were a partnership (Chapter 1)
Limited Liability Company (LLC)
A cross between a partnership and a corporation under which the owners retain limited liability but the company is run and is taxed like a partnership (Chapter 1)
Public Offering
A security offering where all investors have the opportunity to acquire a portion of the financial claims being sold (Chapter 2)
Private Placement
A security offering limited to a small number of potential investors (Chapter 2)
Venture Capitalist
An investment firm for individual that provides money to business start ups (Chapter 2)
Primary Market
A market in which securities are offered for the first time for sale to potential investors (Chapter 2)
Secondary Market
A market in which currently outstanding securities are traded (Chapter 2)
Initial Public Offering (IPO)
The first time a company issues its stock to the public (Chapter 2)
Seasoned Equity Offering (SEO)
The sale of additional stock by a company whose shares are already publicly traded (Chapter 2)
Money Market
All institutions and procedures that facilitate transactions for short-term instruments issued by borrowers with very high credit ratings (Chapter 2)
Capital Market
All institutions and procedures that facilitate transactions in long term financial instruments (Chapter 2)
Spot Market
Cash market (Chapter 2)
Futures Market
Markets where you can buy or sell something at a future date (Chapter 2)
Organized Security Exchange
Formal organization that facilitate the trading of securities (Chapter 2)
Over The Counter Market
All security markets except organized exchanges. The money market is an over-the-counter market. Most corporate bonds also are traded in the over-the-counter market. (Chapter 2)
NASDAQ
Is a computerized system that provides price quotes on over 5,000 over-the-counter stocks and also facilitates traded by matching up buyers and sellers (Chapter 2)
Investment Banker
A financial specialist who underwrites and distributes new securities and advises corporate clients about raising new funds (Chapter 2)
Investment Bank Functions
- Underwriting
- Distributing
- Advising
(Chapter 2)
Syndicate
A group of investment bankers who contractually assist in the buying and selling of a new security issue (Chapter 2)
Negotiated Purchase
A firm needing funds contacts a investment banker who negotiates a price the syndicate will pay for the securities. A negotiated purchase is the most prevalent method of securities distribution in the private sector. (Chapter 2)
Competitive Bid Purchase
When several underwriting groups bid for the right to purchase the new issue from the corporation that is raising funds. Most competitive bid purchases are confined to:
- Railroad Issues
- Public Utility Issues
- Municipal Bond Issues
Best Efforts Basis
The investment banker attempts to sell the issue in return for a fixed commission on each security actually sold. The investment banker only has to give it his or her "best effort" and successful sale is not guaranteed. (Chapter 2)
Privileged Subscription
The process of marketing a new security issue to a select group of investors (Chapter 2)
Dutch Auction
A method of issuing securities (common stock) by which investors place bids indicating how many shares they are willing to buy and at what price. The price the stock is then sold for becomes the lowest price at which the issuing company can sell all the a
Direct Sale
The sale of securities by a corporation to the investing public without the services of an investment banking firm. (Chapter 2)
Flotation Costs
The transaction cost incurred when a firm raises funds by issuing a particular type of security (Chapter 2)
Sarbanes-Oxley Act (SOX)
SOX holds corporate advisors who have access to or influence on company decisions (such as a firm's accountants, lawyers, company officers, and board of directors) legally accountable for any instances of misconduct. SOX safeguards the interests of the sh
Opportunity Cost of Funds
The next best rate of return available to the investor for a given level or risk (Chapter 2)
Inflation Premium
A premium to compensate for anticipated inflation that is equal to the price change expected to occur over the life of the bond or investment instrument (Chapter 2)
Default-Risk Premium
The additional return required by investors to compensate them for the risk of default. It is calculated as the difference in rates between a U.S. Treasury bond and a corporate bond of the same maturity and marketability. (Chapter 2)
Maturity-Risk Premium
The additional return required by the investors in longer-term securities to compensate them for the greater risk of price fluctuation on those securities cause by interest rate changes (Chapter 2)
Liquidity-Risk Premium
The additional return required by investors for securities that cannot be quickly converted into cash at a reasonably predictable price (Chapter 2)
Nominal Rate of Interest
The interest rate paid on debt securities without an adjustment for any loss in purchasing power (Chapter 2)
Real Rate of Interest
The nominal (quoted) rate of interest less any loss in purchasing power of the dollar during the time of the investment (Chapter 2)
Term Structure of Interest Rates
The relationship between interest rates and the term to maturity, where the risk of default is held constant (Chapter 2)
Yield To Maturity
The rate of return a bondholder will receive if the bonds is held to maturity (Chapter 2)
Unbiased Expectations Theory
The theory that the shape of the term structure of interest rates is determined by an investor's expectations about future interest rates (Chapter 2)
Liquidity Preference Theory
The theory that the shape of the term structure of interest rates is determined by an investor's additional required interest rate in compensation for additional risks (Chapter 2)
Market Segmentation Theory
The theory that the shape of the term structure of interest rates implies that the rate of interest for a particular maturity is determined solely by demand and supply for a given maturity. This rate is independent of the demand and supply for securities
Form 10-K
An annual report required by the SEC that provides such information as the firm's history, audited financial statements, management's analysis of the company's performance and executive compensation. (Chapter 3)
Income Statement (Profit & Loss Statement)
A basic accounting statement that measures the results of a firm's operations over a specified period, commonly 1 year. The bottom line of the income statement, net profits (net income), shows the profit or loss for the period that is available for a comp
Cost of Goods Sold (COGS)
The cost of producing or acquiring a product or service to be sold in the ordinary course of business. (Chapter 3)
Gross Profit
Gross Profit = Sales (Revenue) - COGS (Chapter 3)
Operating Expenses
Marketing and selling expenses, general administrative expenses, and deprecation expenses (Chapter 3)
Taxable Income (Earnings Before Taxes)
Taxable Income = Operating income - interest expense (Chapter 3)
Net Income
The earnings available to the firm's common and preferred stockholders (Chapter 3)
Earnings Per Share
Net income on a per share basis (Chapter 3)
Dividends Per Share
The amount of dividends a firm pays for each share outstanding (Chapter 3)
Fixed Costs
Costs that remain constant, regardless of any changes in a firm's activity (Chapter 3)
Variable Costs
Costs that change in proportion to changes in a firm's activity (Chapter 3)
Balance Sheet
A statement that shows a firm's assets, liabilities and shareholder equity at a given point in time. It is a snapshot of the firm's financial position on a particular date. (Chapter 3)
Accounting Book Value
The value of an asset as shown on a firm's balance sheet. It represents the depreciated historical cost of the asset rather than its current market value or replacement cost. (Chapter 3)
Debt
Liabilities consisting of such sources as credit extended by suppliers or loan from a bank. (Chapter 3)
Equity
Stockholder's investment in the firm and the cumulative profits retained in the business up to the date of the balance sheet. (Chapter 3)
Preferred Stockholders
Stockholders who have claims on the firm's income and assets after creditors, but before common stockholders (Chapter 3)
Common Stockholders
Investors who own the firm's common stock. Common stockholders are the residual owners of the firm. (Chapter 3)
Par Value
The arbitrary value a firm puts on each share of stock prior to its being offered for sale. (Chapter 3)
Paid In Capital
The amount a company receives above par value from selling stock to investors. (Chapter 3)
Capital Gains
Gains from selling any asset that is not part of the ordinary operations (Chapter 3)
Liquidity
A firm's ability to pay its bills on time. Liquidity is related to the ease and speed with which a firm can convert its non cash assets into cash. (Chapter 4)
Asset Management
How effectively management is using the firm's asset's to generate sales (Chapter 4)
Return On Equity
A firm's net income divided by its common stock. This ratio is the accounting rate of return earned on the common stockholder's investment. (Chapter 4)
Price/Earnings Ratio
Price Earnings Ratio (PER) = market price per share/earnings per share (Chapter 4)
Example: Earnings per share $2 & Stock price of $30 per share .. PER = $30/2 = $15
Price/Book Ratio
The market value of a share of the form's stock divided by the book value per share of the firms reported equity in the balance sheet. (Chapter 4)
Economic Value Added
Measures a company's economic profits, as compared to its accounting profits, by influencing not only interest expense as a cost but also the shareholders' required rate of return on their investment (Chapter 4)
Operating Income
Operating Income = Sales - COGS - operating expenses (Chapter 3)