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Definition of Capital
Money invested in a firm.
The money, raised by selling stock or bonds or taking out loans, that you use to start, operate, and grow a business.
The shareholders’ investment in the business; the difference between the assets and liabilities
A very broad term rooted in economic theory and referring to
The investment by a company’s owners in a business, plus the impact of any
a) Physical capital: buildings, equipment, and any materials used to produce other goods and services in the future rather than being consumed today.
Expenditures Purchases of productive long-lived assets, in particular, items of property,
Any asset or stock of assets, financial or physical, capable of producing income.
Average cost of capital
A firm's required payout to the bondholders and to the stockholders expressed as a
Net result of public and private international investment and lending activities.
decision Allocation of invested funds between risk-free assets versus the risky portfolio.
Capital asset pricing model (CAPM)
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
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
Total par value (number of shares issued, multiplied by the par value of each share). Also
Efficient capital market
A market in which new information is very quickly reflected accurately in share
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.
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
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
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.
Pecking-order view (of capital structure)
The argument that external financing transaction costs, especially
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
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
Wealth that can be represented in financial terms, such as savings account balances, financial
"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 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.
CAPITAL IN EXCESS OF PAR VALUE
What a company collected when it sold stock for more than the par value per share.
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
Weighted average cost of capital
See cost of capital.
Current assets less current liabilities. Money that revolves in the business as part of the process of buying, making and selling goods and services, particularly in relation to debtors, creditors, inventory and bank.
Additional paid-in capital
Amounts in excess of the par value or stated value that have been paid by the public to acquire stock in the company; synonymous with capital in excess of par.
Capital in excess par
Amounts in excess of the par value or stated value that have been paid by the public to acquire stock in the company; synonymous with additional paid-in capital.
The amount put into the business by the owners by purchasing stock and by paying more than the par value for the stock (additional paid-in capital or capital in excess of par).
Refers generally to analysis procedures for ranking
Refers to investments by a business in long-term
capital investment analysis
Refers to various techniques and procedures
Refers to recouping, or regaining, invested capital over
Ownership shares issued by a business corporation. A business
capital structure, or capitalization
Terms that refer to the combination of
capitalization of costs
When a cost is recorded originally as an increase
cost of capital
Refers to the interest cost of debt capital used by a business
market capitalization, or market cap
Current market value per share of
weighted-average cost of capital
Weighted means that the proportions of
Capital Asset Pricing Model (CAPM)
A model for estimating equilibrium rates of return and values of
The process of ranking and selecting investment alternatives and
A market that specializes in trading long-term, relatively high risk
The combination of debt, preferred stock, and common stock used
Cost of Capital
The minimum rate of return a company must earn in order to meet
Weighted Average Cost of Capital (WACC)
The weighted average of the costs of the capital components
an asset used to generate revenues or cost savings
management’s plan for investments in longterm
a process of evaluating an entity’s proposed
a condition that exists when there is an
cost of capital (COC)
the weighted average cost of the
the intangible assets of skill, knowledge,
opportunity cost of capital
the highest rate of return that
optimal mix of capital
the combination of capital sources at which the lowest weighted average cost of capital is achieved
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