Financial Terms
Internal finance

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Definition of Internal finance

Internal Finance Image 1

Internal finance

finance generated within a firm by retained earnings and depreciation.

Related Terms:

pecking order theory

Firms prefer to issue debt rather than equity if internal finance is insufficient.

Corporate finance

One of the three areas of the discipline of finance. It deals with the operation of the firm
(both the investment decision and the financing decision) from that firm's point of view.

External finance

finance that is not generated by the firm: new borrowing or a stock issue.


A discipline concerned with determining value and making decisions. The finance function allocates
resources, which includes acquiring, investing, and managing resources.

Incremental internal rate of return

IRR on the incremental investment from choosing a large project
instead of a smaller project.

Internal growth rate

Maximum rate a firm can expand without outside source of funding. Growth generated
by cash flows retained by company.

Internal market

The mechanisms for issuing and trading securities within a nation, including its domestic
market and foreign market.
Compare: external market.

Internal Finance Image 2

Internal measure

The number of days that a firm can finance operations without additional cash income.

Internal rate of return

Dollar-weighted rate of return. Discount rate at which net present value (NPV)
investment is zero. The rate at which a bond's future cash flows, discounted back to today, equals its price.

Internally efficient market

Operationally efficient market.

International finance subsidiary

A subsidiary incorporated in the U.S., usually in Delaware, whose sole
purpose was to issue debentures overseas and invest the proceeds in foreign operations, with the interest paid
to foreign bondholders not subject to U.S. withholding tax. The elimination of the corporate withholding tax
has ended the need for this type of subsidiary.

Offshore finance subsidiary

A wholly owned affiliate incorporated overseas, usually in a tax haven country,
whose function is to issue securities abroad for use in either the parent's domestic or its foreign business.

Portfolio internal rate of return

The rate of return computed by first determining the cash flows for all the
bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows
equal to the market value of the portfolio.

Internal rate of return (IRR)

A discounted cash flow technique used for investment appraisal that calculates the effective cost of capital that produces a net present value of zero from a series of future cash flows and an
initial capital investment.

internal accounting controls

Refers to forms used and procedures
established by a business—beyond what would be required for the
record-keeping function of accounting—that are designed to prevent
errors and fraud. Two examples of internal controls are (1) requiring a
second signature by someone higher in the organization to approve a
transaction in excess of a certain dollar amount and (2) giving customers
printed receipts as proof of sale. Other examples of internal
control procedures are restricting entry and exit routes of employees,
requiring all employees to take their vacations and assigning another
person to do their jobs while they are away, surveillance cameras, surprise
counts of cash and inventory, and rotation of duties. internal controls
should be cost-effective; the cost of a control should be less than
the potential loss that is prevented. The guiding principle for designing
internal accounting controls is to deter and detect errors and dishonesty.
The best internal controls in the world cannot prevent most fraud
by high-level managers who take advantage of their positions of trust
and authority.

internal rate of return (IRR)

The precise discount rate that makes the
present value (PV) of the future cash returns from a capital investment
exactly equal to the initial amount of capital invested. If IRR is higher
than the company’s cost-of-capital rate, the investment is an attractive
opportunity; if less, the investment is substandard from the cost-ofcapital
point of view.

Internal Rate of Return (IRR)

The discount rate that equates the present value of the net cash
inflows with the present value of the net cash outflows
(investments). The IRR measures the profitability (rate of return) of
an investment in a project or security.

internal control

any measure used by management to protect
assets, promote the accuracy of records, ensure adherence
to company policies, or promote operational efficiency;
the totality of all internal controls represents the
internal control system

internal rate of return (IRR)

the expected or actual rate of
return from a project based on, respectively, the assumed
or actual cash flows; the discount rate at which the net
present value of the cash flows equals zero

Internal rate of return

a. The average annual yield earned by an investment during the period held.
b. The effective rate of interest on a loan.
c. The discount rate in discounted cash flow analysis.
d. The rate that adjusts the value of future cash receipts earned by an investment so that interest earned equals the original cost.
See Yield to maturity.

Internal rate of return

The rate of return at which the present value of a series of future
cash flows equals the present value of all associated costs. This measure is most
commonly used in capital budgeting.

internal growth rate

Maximum rate of growth without external financing.

internal rate of return (IRR)

Discount rate at which project NPV = 0.

internally generated funds

Cash reinvested in the firm; depreciation plus earnings not paid out as dividends.

Internal Revenue Code

Refers to all federal tax laws as a group.

Internal Revenue Service

A federal agency empowered by Congress to interpret and enforce tax-related laws.

Finance Company

Company engaged in making loans to individuals or businesses. Unlike a bank, it does not receive deposits from the public.







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