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Definition of Seniority
The order of repayment. In the event of bankruptcy, senior debt must be repaid before subordinated
State of being unable to pay debts. Thus, the ownership of the firm's assets is transferred from
The argument that expected indirect and direct bankruptcy costs offset the other
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.
The argument that expected bankruptcy costs preclude firms from being financed entirely
The ratio of net income before taxes to net sales.
A conditional trading order that indicates a security may be purchased only at the designated
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.
Indicator of financial leverage. Compares assets provided by creditors to assets provided
Ability to borrow. The amount a firm can borrow up to the point where the firm value no
The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be
An asset requiring fixed dollar payments, such as a government or corporate bond.
The amplification of the return earned on equity when an investment or firm is financed
A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.
The market for trading debt instruments.
Total debt divided by total assets.
Reducing the principal and/or interest payments on LDC loans.
IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
Interest payment plus repayments of principal to creditors, that is, retirement of debt.
Debt service parity approach
An analysis wherein the alternatives under consideration will provide the firm
Debt-service coverage ratio
Earnings before interest and income taxes plus one-third rental charges, divided
A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
Debtor in possession
A firm that is continuing to operate under Chapter 11 bankruptcy process.
New debt obtained by a firm during the Chapter 11 bankruptcy process.
Earnings before interest and taxes (EBIT)
A financial measure defined as revenues less cost of goods sold
Economic order quantity (EOQ)
The order quantity that minimizes total inventory costs.
The risk that the ability of an issuer to make interest and principal payments will change because
A statistical study that examines how the release of information affects prices at a particular time.
Events of default
Contractually specified events that allow lenders to demand immediate repayment of a debt.
FHA prepayment experience
The percentage of loans in a pool of mortgages outstanding at the origination
Fill or kill order
A trading order that is canceled unless executed within a designated time period.
Firm's net value of debt
Total firm value minus total firm debt.
debt maturing after more than one year.
Interest rate on debt
The firm's cost of debt capital.
Junior debt (subordinate debt)
debt whose holders have a claim on the firm's assets only after senior
Lag response of prepayments
There is typically a lag of about three months between the time the weighted
A legal proceeding for liquidating or reorganizing a business.
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
An obligation having a maturity of more than one year from the date it was issued. Also
Indicator of financial leverage. Shows long-term debt as a proportion of the
Long-term debt ratio
The ratio of long-term debt to total capitalization.
Long-term debt to equity ratio
A capitalization ratio comparing long-term debt to shareholders' equity.
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.
Open (good-til-cancelled) order
An individual investor can place an order to buy or sell a security. That
Original issue discount debt (OID debt)
debt that is initially offered at a price below par.
Pecking-order view (of capital structure)
The argument that external financing transaction costs, especially
A bankruptcy in which a debtor and its creditors pre-negotiate a plan or
Also called speed, the estimated rate at which mortgagors pay off their loans ahead of
Payments made in excess of scheduled mortgage principal repayments.
debt that, in the event of default, has first claim on specified assets.
Sell limit order
Conditional trading order that indicates that a, security may be sold at the designated price or
debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.
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
debt that has been customized for the buyer, often by incorporating unusual options.
Subordinated debenture bond
An unsecured bond that ranks after secured debt, after debenture bonds, and
debt over which senior debt takes priority. In the event of bankruptcy, subordinated
Total debt to equity ratio
A capitalization ratio comparing current liabilities plus long-term debt to
debt maturing within one year (short-term debt). See: funded debt.
debt that does not identify specific assets that can be taken over by the debtholder in case of default.
assumption The assumption of payment of scheduled principal and interest with no payments.
RATIO OF DEBT TO STOCKHOLDERS’ EQUITY
A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
Borrowings from financiers.
Sales to customers who have bought goods or services on credit but who have not yet paid their debt.
Earnings before interest and taxes (EBIT)
The operating profit before deducting interest and tax.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
The operating profit before deducting interest, tax, depreciation and amortization.
A payment made in advance of when it is treated as an expense for profit purposes.
Profit before interest and taxes (PBIT)
The amount of accounts receivable that is not expected to be collected.
Expenses that have been paid for but have not yet been used up; examples are prepaid insurance and prepaid rent.
Refers to accounts receivable from credit sales to customers
A widely used financial statement ratio to assess the
earnings before interest and income tax (EBIT)
A measure of profit that
Cost of Debt
The cost of debt (bonds, loans, etc.) that a company is charged for
The percentage of debt that is used in the total capitalization of a
Total Debt to Total Assets Ratio
See debt ratio
economic order quantity (EOQ)
an estimate of the number
engineering change order (ECO)
a business mandate that changes the way in which a product is manufactured or a
job order cost sheet
a source document that provides virtually
job order costing system
a system of product costing used
open purchase ordering
a process by which a single purchase
the variable cost associated with preparing,
the level of inventory that triggers the placement
a cost incurred to improve quality by preventing
special order decision
a situation in which management must determine a sales price to charge for manufacturing or service jobs outside the company’s normal production/service market
Allowance for bad debts
An offset to the accounts receivable balance, against which
An account receivable that cannot be collected.
Funds owed to another entity.
A debt for which payments will be required for a period of more than
An expenditure that is paid for in one accounting period, but which
The reorganization or liquidation of a firm that cannot pay its debts.
economic order quantity
order size that minimizes total inventory costs.
debt with more than 1 year remaining to maturity.
MM's proposition I (debt irrelevance proposition)
The value of a firm is unaffected by its capital structure.
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