Basic Finance

future value of a dollar

Amount to which a single payment will grow at some rate of interest

dividend reinvestment plans (DRIPs)

Plans that permit stockholders to have cash dividends reinvested in additional shares instead of receiving cash

annuity

a same-size payment made or received over and over.

account receivable

account arising from a credit sale that has not been collected

accelerated depreciation

allocating the cost of plant and equipment in such a way that a larger proportion of an asset's cost is recovered during the earlier years of an asset's life

straight-line depreciation

allocating the cost of the plant and equipment by equal amounts over a period of time

principal

amount owed

future value of an annuity

amount to which a series of equal payments will grow at some rate of interest

time series analysis

analysis of a firm over a period of time

cross-sectional analysis

analysis of several firms in the same industry at a point in time

annuity due

annuity in which the payments are made at the beginning of the time period

ordinary annuity

annuity in which the payments are made at the end of the time period

long-term assets

assets that are expected to be held for more than a year, such as plant and equipment

hidden assets

assets that have appreciated in value but are carried on the balance sheet at a lower value, such as their original cost

collateral

assets used to secure a loan or debt instrument

board of directors

body elected by and responsible to stockholders to set policy and hire management to run a corporation

eurobond

bond sold in a foreign country but denominated in the currency of the issuing firm

mortgage bonds

bonds secured by a claim on real estate

revenue bonds

bonds supported by the assets the bonds financed; income bonds issued by state and local governments

zero coupon bonds

bonds that are initially sold at a discount and on which interest accrues and is paid at maturity

convertible bonds

bonds that may converted into (exchanged for) stock at the option of the bondholder

income bonds

bonds whose interest is paid only if it is earned by the firm

subordinated debentures

bonds with a lower claim on the firm's assets that the claims of other debt instruments

book value per share

book value divided by number of shares outstanding

discounting

bringing a future amount back to the present

preferred stock

class of stock (equity) that has a claim prior to common stock on the firm's earnings and assets.

credit ratings

classification schemes designed to indicate the risks associated with a particular debt instrument

quick ratio (acid test)

current assets excluding inventory divided by current liabilities; measure of liquidity

preset value

current value of a dollar to be received in the future

preset value of an annuity

current value of a series of equal payments to be received in the future

Pay date or distribution date

day on which a dividend is paid to stockholders

date of record

day on which an investor must own stock in order to receive the dividend payment

serial bonds

debt issued in a series so that some of the bonds periodically mature

long-term liability

debt that becomes due after one year

current liability

debt that must be paid during the fiscal year

stock dividends

distribution from earnings paid in additional shares of stock

cash dividends

distribution from earnings paid in the form of cash

arrears

dividends on a cumulative preferred stock that have not been paid and have accumulated

indenture

document specifying the terms of a debt issue

EBIT

earnings before interest and taxes

default

failure to meet the terms specified in the indenture of a debt issue

statement of cash flows

financial statement summarizing cash inflows and outflows

balance sheet

financial statement that enumerates (as of a point in time) what an economic unit owns and owes its net worth

income statement

financial statement that summarizes revenues and expenses for a period of time to determine profit or loss

stockholder's equity

firm's net worth; stockholders' investment in the firm; the sum of stock, paid-in capital, and retained earnings

book value

firm's total assets minus total liabilities; equity; net worth

current yield

interest / current price of the bond

Compounding

is taking an amount from the present into the future

assets

items or property owned by a firm, household, or government and valued in monetary terms

security market line

line specifying the required return for different levels of risk

bond

long-term debt instrument that specifies principle, interest, and maturity date

variable interest rate bonds

long-term debt instruments whose interest payments vary with changes in short-term interest rates or the Consumer Price Index

DuPont system

measure of earning capacity that combines asset turnover, profitability, and financial leverage

average collection period (days sales outstanding)

number of days required on the average to collect an account receivable

equity

owners' investment in a firm; a firm's book value or net worth

consolidated balance sheet

parent company's balance sheet, which summarizes and combines the balance sheets of the firm's various subsidiaries

interest

payment for the use of the principal

non-annual compounding

payment of interest more frequently than once a year

high-yield (junk) bonds

poor-quality debt with high yields and high probability on default

risk

possibility of loss; the uncertainty that the anticipated return will not be achieved.

cumulative preferred stock

preferred stock whose dividends accumulate (accrue) if not paid

noncumulative preferred stock

preferred stock whose dividends do not accumulate if the firm misses a dividend payment

valuation

process of determining what an asset is currently worth

payout ratio

ratio of cash dividends to earnings

current ratio

ratio of current assets to current liabilities: measure of liquidity

debt/net worth ratio

ratio of debt to equity; debt divided by equity

times-preferred-dividend-earned

ratio of earnings / preferred dividend requirements

net profit margin

ratio of earnings after interest and taxes to sales; percentage earned on sales

return on equity

ratio of earnings to owners' equity; percentage earned on equity

return on total assets

ratio of earnings to total assets; percentages on assets

operating profit margin

ratio of operating income to sales; percentage earned on sales before deducting interest expense and taxes

basic earning power

ratio of operating income to total assets; measure of the firm's ability to generate income before considering interest and taxes

gross profit margin

ratio of revenues - cost of goods sold to sales; percentage earnings on sales before considering operation expenses, interest, and taxes

fixed asset turnover

ratio of sales to fixed assets; measure of fixed assets necessary to generate sales

total asset turnover

ratio of sales to total assets: measure of total assets required to generate sales

inventory

raw materials, work-in-process, and finished goods; what a firm has available to sell

stock split

recapitalization achieved by changing the number of shares outstanding

dilution

reduction in earnings per share as the result of issuing additional shares

trustee

representative of the rights of bondholders who enforces the terms of the indenture

yield to maturity

return earned from holding the bond until it matures

yield

return on a bond expressed as a current yield or yield to maturity

preemptive rights

right of current stockholders to maintain their proportionate ownership in the firm

rights offering

sale of new securities to stockholders by offering them the option (right) to purchase new shares

common stock

security representing ownership in a corporation; common stock owners have a final claim on the firm's assets and earnings after the firm has met its obligations to creditors and preferred stockholders

equipment trust certificates

serial bond issued by transportation companies that are secured by the equipment purchased with the proceeds of the loan

sinking fund

series of periodic payments to retire a bond issue

current assets

short-term assets that are expected to be converted into cash during the fiscal year

receivables turnover

speed with which accounts receivable are collected

inventory turnover

speed with which inventory is sold; sales divided by average inventory

Ex dividend

stock purchases exclusive of any dividend payment

maturity date

the day on which the debt must be repaid

P/E ratio

the ratio of a stock's price to earnings per share

debt ratio

total debt / total assets; proportion of assets financed by debt; a measure of financial leverage

earnings per preferred share

total earnings / the number of preferred shares outstanding

modified accelerated cost recovery system (MACRS)

type of accelerated depreciated that became law under the tax revision of 1981 and that was revised under the 1986 Tax Reform Act

debentures

unsecured bonds

financial leverage

use of borrowed funds in return for agreeing to pay a fixed return; use of debt financing.

cumulative voting

voting system that encourages minority representation by permitting stockholders to cast all their shares (votes) for one candidate for the firm's board of directors

liabilities

what an economic unit owes expressed in monetary terms

return

what is earned on an investment; the sum of income and capital gains generated by an investment