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Definition of Adverse selection
A situation in which market participation is a negative signal.
The argument that external financing transaction costs, especially
A type of active international management that measures the contribution to performance
Asset allocation in which the investor chooses among investments denominated in
Choosing the particular securities to include in a portfolio.
Consequence of a contract that induces only one group (e.g. low risk individuals) to participate.
An active portfolio management technique that focuses on advantageous selection of
The argument that specifies that the various agency costs create a complex environment in
A firm's required payout to the bondholders and to the stockholders expressed as a
The argument that expected indirect and direct bankruptcy costs offset the other
The argument that expected bankruptcy costs preclude firms from being financed entirely
A conditional trading order that indicates a security may be purchased only at the designated
Money invested in a firm.
Net result of public and private international investment and lending activities.
decision Allocation of invested funds between risk-free assets versus the risky portfolio.
An economic theory that describes the relationship between risk and
A firm's set of planned capital expenditures.
The process of choosing the firm's long-term capital assets.
Amount used during a particular period to acquire or improve long-term assets such as
The transfer of capital abroad in response to fears of political risk.
When a stock is sold for a profit, it's the difference between the net sales price of securities and
Capital gains yield
The price change portion of a stock's return.
A lease obligation that has to be capitalized on the balance sheet.
The difference between the net cost of a security and the net sale price, if that security is sold at a loss.
The market for trading long-term debt instruments (those that mature in more than one year).
Capital market efficiency
Reflects the relative amount of wealth wasted in making transactions. An efficient
Capital market imperfections view
The view that issuing debt is generally valuable but that the firm's
Capital market line (CML)
The line defined by every combination of the risk-free asset and the market portfolio.
Placing one or more limits on the amount of new investment undertaken by a firm, either
The makeup of the liabilities and stockholders' equity side of the balance sheet, especially
Amounts of directly contributed equity capital in excess of the par value.
The debt and/or equity mix that fund a firm's assets.
A method of constructing a replicating portfolio in which the manager purchases a
Also called financial leverage ratios, these ratios compare debt to total capitalization
A table showing the capitalization of a firm, which typically includes the amount of
Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures
Interest that is not immediately expensed, but rather is considered as an asset and is then
Complete capital market
A market in which there is a distinct marketable security for each and every
Corporate tax view
The argument that double (corporate and individual) taxation of equity returns makes
Cost of capital
The required return for a capital budgeting project.
Cost of limited partner capital
The discount rate that equates the after-tax inflows with outflows for capital
Covariance of a national economy's rate of return and the rate of return the world economy
Country financial risk
The ability of the national economy to generate enough foreign exchange to meet
Country risk General
Level of political and economic uncertainty in a country affecting the value of loans or
Refers to the volatility of returns on international investments caused by events associated
An order to buy or sell stock that automatically expires if it can't be executed on the day it is entered.
Total par value (number of shares issued, multiplied by the par value of each share). Also
Economic order quantity (EOQ)
The order quantity that minimizes total inventory costs.
Efficient capital market
A market in which new information is very quickly reflected accurately in share
Fill or kill order
A trading order that is canceled unless executed within a designated time period.
Hard capital rationing
capital rationing that under no circumstances can be violated.
The unique capabilities and expertise of individuals.
Issued share capital
Total amount of shares that are in issue. Related: outstanding shares.
Value at which a company's shares are recorded in its books.
An order to buy a stock at or below a specified price or to sell a stock at or above a specified
Limit order book
A record of unexecuted limit orders that is maintained by the specialist. These orders are
Liquidity theory of the term structure
A biased expectations theory that asserts that the implied forward
Indicator of financial leverage. Shows long-term debt as a proportion of the
The total dollar value of all outstanding shares. Computed as shares times current
Market capitalization rate
Expected return on a security. The market-consensus estimate of the appropriate
This is an order to immediately buy or sell a security at the current trading price.
Negotiable order of withdrawal (NOW)
Demand deposits that pay interest.
Net working capital
Current assets minus current liabilities. Often simply referred to as working capital.
Nondiversifiability of human capital
The difficulty of diversifying one's human capital (the unique
Open (good-til-cancelled) order
An individual investor can place an order to buy or sell a security. That
Opportunity cost of capital
Expected return that is foregone by investing in a project rather than in
In the balance of payments, other capital is a residual category that groups all the capital
Outstanding share capital
Issued share capital less the par value of shares that are held in the company's treasury.
Perfect capital market
A market in which there are never any arbitrage opportunities.
Perfect market view (of capital structure)
Analysis of a firm's capital structure decision, which shows the
Perfect market view (of dividend policy)
Analysis of a decision on dividend policy, in a perfect capital
Personal tax view (of capital structure)
The argument that the difference in personal tax rates between
Pie model of capital structure
A model of the debt/equity ratio of the firms, graphically depicted in slices of
Planned capital expenditure program
capital expenditure program as outlined in the corporate financial plan.
Pro forma capital structure analysis
A method of analyzing the impact of alternative capital structure
A periodic review of a capital investment project to evaluate its continued economic viability.
Wealth that can be represented in financial terms, such as savings account balances, financial
Sell limit order
Conditional trading order that indicates that a, security may be sold at the designated price or
Single country fund
A mutual fund that invests in individual countries outside the United States.
Signaling view (on dividend policy)
The argument that dividend changes are important signals to investors
"Soft" Capital Rationing
capital rationing that under certain circumstances can be violated or even viewed
Static theory of capital structure
Theory that the firm's capital structure is determined by a trade-off of the
An order to sell a stock when the price falls to a specified level.
Stop order (or stop)
An order to buy or sell at the market when a definite price is reached, either above (on a
A stop order that designates a price limit. In contrast to the stop order, which becomes a
Structured arbitrage transaction
A self-funding, self-hedged series of transactions that usually utilize
Debt that has been customized for the buyer, often by incorporating unusual options.
Structured portfolio strategy
A strategy in which a portfolio is designed to achieve the performance of some
An agreement in settlement of a lawsuit involving specific payments made over a
Taking a view
A London expression for forming an opinion as to where market prices are headed and acting on it.
Tax differential view ( of dividend policy)
The view that shareholders prefer capital gains over dividends,
Traditional view (of dividend policy)
An argument that "within reason," investors prefer large dividends to
An investment in a start-up business that is perceived to have excellent growth prospects but
Weighted average cost of capital
Expected return on a portfolio of all the firm's securities. Used as a hurdle
Defined as the difference in current assets and current liabilities (excluding short-term
Working capital management
The management of current assets and current liabilities to maximize shortterm liquidity.
Working capital ratio
Working capital expressed as a percentage of sales.
The money, raised by selling stock or bonds or taking out loans, that you use to start, operate, and grow a business.
CAPITAL IN EXCESS OF PAR VALUE
What a company collected when it sold stock for more than the par value per share.
The shareholders’ investment in the business; the difference between the assets and liabilities
The total of debt and equity, i.e. the total funds in the business.
To make a payment that might otherwise be an expense (in the Profit and Loss account) an asset
The market in which investors buy and sell shares of companies, normally associated with a Stock Exchange.
Cost of capital
The costs incurred by an organization to fund all its investments, comprising the risk-adjusted
Return on capital employed (ROCE)
The operating profit before interest and tax as a percentage of the total shareholders’ funds plus
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