Michelle A.

a stream of equal periodic cash flows

Annuity

an annuity for which he payment occure at the beginning of each period

Annuity Due

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Describes the process of calculating present values

Discounting

the annual rate of interest actually paid or earned, reflecting the impact of compounding frequency (true annual return)

Effective Annual Rate (EAR)

the value of an investment made today measured at a specific future date using compound interest

Future Value

an annuity for which the payments occur at the end of each period

Ordinary Annuity

a level or growing cash flow stream that continues forever

Perpetuity

the value today of a cash flow to be received at a specific date in the future assuming an opportunity to earn interest at a specified rate

Present Value

interest compounds four times per year

Quarterly Compounding

interest compounds twice a year

Semiannual Compounding

letter ratings assigned to bonds by specialized agencies that evaluate the capacity of bond issuers to repay their debs. Lower ratings signify higher default risk

Bond Ratings

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the rate derived by dividing the bond's annual coupon payment by its par value

Coupon Rate

the risk that the corporation issuing a bond may not make all scheduled payments

Default risk

a bond sells at a discount when its market price is less than its par value

Discount

the date when a bond's life ends and the borrower must make the final interest payment and repay the principal

Maturity Date

the face value of a bond, which the borrower repays at maturity

Par Value

A bond that sells for more than its par value

Premium

bonds that pay no interest and sell below par value (also called zero-coupon bonds)

Pure Discount Bond

the rate of return that investors expect or require an investment to earn given its risk

Required rate of return

the discount rate that equates the present value of the bond's cash flows to its market price

Yield to Maturity

a measure of the speed with which a firm converts various accounts into sales or cash

Activity ratios

a measure of the proportion of total assets financed by a firm's equity (equity multiplier)

Assets-to-equity (A/E) ratio

a measure of inventory turnover, calculated by dividing the turnover figure into 365, the # of days in a year

Average age of inventory

the average amount of time that elapses from a sale on credit until the payment becomes usable funds for a firm. Calculated by dividing accounts receivable by average sales per day

Average collection period

the average length of time it takes a firm to pay its suppliers, calculated by dividing the firm's accounts payable balance by its average daily purchases

Average payment period (APP)

a measure of a firm's ability to meet its short-term obligations defined as current assets divided by current liabilities

Current Ratio

a measure of the proportion of total assets financed by a firm's creditors

Debit ratio

a measure of the firm's financial leverage, calculated by divided long-term debt b stockholders' equity

Debit-to-equity ratio

net income net of preferred stock dividents

Earnings available to common stockholders

earnings available for common stockholders divided by the number of shares of common stock outstanding

Earnings per share (EPS)

a measure of the proportion of total assets financed by a firm's equity

Equity Multiplier

a measure of the efficiency with which a firm uses its fixed assets, calculated by dividing sales by the number of dollars of net fixed asset investment

Fixed asset turnover

the net amount of cash flow remaining after the firm has met all operating needs and paid for investments, both long-term (fixed) and short-term (current). Represents the cash amount that a firm could distribute to investors after meeting all its other obligations

Free cash flow (FCF)

a measure of profitability that represents the percentage of each sales dollar remaining after a firm has paid for its goods

Gross Profit margin

a measure of how quickly a firm sells its goods

Inventory turnover

Calculating and interpreting financial ratios to assess a firm's performance and status

Liquidity ratios

a measure used to assess a firm's future performance by relating its market value per share to its book value per share

Market/Book (M/B) Ratio

a measure of profitability that represents the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted

Net profit Margin

amount of cash flow generated by a firm form its operations. Mathematically, earnings before interest and taxes (EBIT) minus taxes plus depreciation

Operating Cash Flow (OCF)

measure of profitability that represents the percentage of each sales dollar remaining after deducting all costs and expenses other than interest and taxes

Operating profit margin

measure of a firm's long term growth prospects that represents the amount investors are willing to pay for each dollar of a firm's earnings

Price/Earnings (P/E) Ratio

measure of a firm's liquidity that is similar to the current ratio except that it excludes inventory, which is usually the least-liquid current asset

Quick (acid-test) ratio

measure that captures the return earned on the common stockholders' (owners') investment in a firm

Retur on common equity (ROE)

measure of the overall effectiveness of management in generating returns to common stockholders with its available assets

Return on total assets (ROA)

measure of the firm's ability to make contractual interest payments, calculated by dividing earnings before interest and taxes by interest expense

Times interest earned ratio

a measure of the efficiency with which a firm uses all its assets to generate sales' calculated by dividing the dollars of sales a firm generates by the dollars of asset investment

Total asset turnover

the conflict between the goals of a firm's owners and its managers

Agency Problems

selecting the best projects in which to invest the resources of the firm, based on each project's perceived risk and expected return

Capital budgeting function

developing ownership and corporate governance structures for companies that ensure that managers behave ethically and make decisions that benefit shareholders

Corporate Governance Functions

in U.S. law, a separate legal entity with many of the same economic rights and responsibilities as those enjoyed by individuals

Corporation

raising capital to support companies' operations and investment programs

External Financing Function

managing firms' internal cash flows and its mix of debt and equity financing, both to maximize the value of the debt and equity claims on the firms' and to ensure that companies can pay off their obligations when they come due

Financial Management Function

one or more totally passive participants in a limited partner ship, who do not take any active role in the operation of the business and who do not face personal liability for the debts of the business

Limited Partners

sales of securities to investors by a corporation to raise capital for the firm

Primary-Market Transactions

managing firm's exposures to all types of risk, both insurable and uninsurable, in order to maintain optimum risk-return trade-offs and thereby maximize shareholder value

Risk Management Function

trades between investors that generate no new cash flow for the firm

Secondary-market Transactions

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