Glossary of Finance Terms

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Call Option
An option to buy, or "call," a share of stock at a certain price within a specified period.
Call Provision
A provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date.
Cannibalization
Occurs when the introduction of a new product causes sales of existing products to decline.
Capital Asset Pricing Model (CAPM)
A model based on the proposition that any stock's required rate of return is equal to the risk-free rate of return plus a risk premium which reflects only the risk remaining after diversification.
Capital Budgeting
The process of planning expenditures on assets whose cash flows are expected to extend beyond one year.
Capital Component
One of the types of capital used by firms to raise money.
Capital Gain or Loss
The profit (loss) from the sale of a capital asset for more (less) than its purchase price.
Capital Gains Yield
The capital gain during a given year divided by the beginning price.
Capital Intensity Ratio
The amount of assets required per dollar of sales (A*/So)
Capital Markets
The financial markets for stocks and for long-term debt (one year or longer)
Capital Rationing
A situation in which a constraint is placed on the total size of the firm's capital budget.
Cash Budget
A table showing cash flows (receipts, disbursements, and cash balances) for a firm over a specified period.
Cash Discount
A reduction in the price of goods given to encourage early payment.
Cash Flow (CF)
This term designates uneven cash flows.
Change in Net Working Capital
The increased current assets resulting from a new project minus the spontaneous increase in accounts payable and accruals.
Check Clearing
The process of converting a check that has been written and mailed into cash in the payee's account.
Classified Stock
Common stock that is given a special designation, such as Class A, Class B, and so forth, to meet special needs of the company.
Clientele Effect
The tendency of a firm to attract a set of investors who like its dividend policy.
Closely Held Corporation
A corporation that is owned by a few individuals who are typically associated with the firm's management.
Coefficient of Variation (CV)
Standardized measure of the risk per unit of return; calculated as the standard deviation divided by the expected return.
Collection Policy
The procedures that a firm follows to collect accounts receivable.
Collections Float
The amount of checks that we have received but which have not yet been credited to our account.
Commercial Paper
Unsecured, short-term promissory notes of large firms, usually issued in denominations of $100,000 or more and having an interest rate somewhat below the prime rate.
Commodity Futures
A contract that is used to hedge against price changed for input materials.
Common Stockholders' Equity (Net Worth)
The capital supplied by common stockholder-capital stock, paid-in capital, retained earnings and, occasionally, certain reserves. Total equity is common equity plus preferred stock.
Compensating Balance
A bank balance that a firm must maintain to compensate the bank for services rendered or for granting a loan.
Compensating Balance
A minimum checking account balance that a firm must maintain with a commercial bank, generally equal to 10 to 20 percent of the amount of loan outstanding.
Compounding
The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied.
Computerized Inventory Control System
A system of inventory control in which a computer is used to determine reorder points and to adjust inventory balances.
Congeneric Merger
A merger of firms in the same general industry, but for which no customer or supplier relationship exists.
Conglomerate Merger
A merger of companies in totally different industries.
Consol
A perpetual bond issued by the British government to consolidate past debts; in general, any perpetual bond.
Constant Growth Model
Also called the Gordon Model, it is used to find the value of a constant growth stock.
Constant Ratio Method
A method of forecasting future financial statements, and future financial requirements, that assumes certain financial ratios will remain constant.
Continuous Compounding
A situation in which interest is added continuously rather than at discrete points in time.
Conversion Price, Pc
The effective price paid for common stock obtained by converting a convertible security.
Conversion Ratio, CR
The number of shares of common stock that are obtained by converting a convertible bond or share of convertible preferred stock.
Conversion Value, Ct
The value of common stock obtained by converting a convertible security.
Convertible Bond
A bond that is exchangeable, at the option of the holder, for common stock of the issuing firm.
Convertible Currency
A currency that may be readily exchanged for other currencies.
Convertible Security
A security, usually a bond or preferred stock, that is exchangeable at the option of the holder for the common stock of the issuing firm.
Corporate Bonds
Bonds issued by corporations.
Corporate, or Strategic, Alliance
A cooperative deal that stops short of a merger.
Corporate, or Within-Firm, Risk
Risk not considering the effects of stockholders' diversification; it is measured by a project's effect on uncertainty about the firm's future earnings.
Corporation
A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability.
Correlation
The tendency of two variables to move together.
Correlation Coefficient
A measure of the degree of relationship between two variables.
Cost of New Common Equity, ke
The cost of external equity; based on the cost of retained earnings, but increased for flotation costs.
Cost of Preferred Stock, kps
The rate of return investors require on the firm's preferred stock. kps is calculated as the preferred dividend, Dps, divided by the net issuing price, Pn.
Cost of Retained Earnings, ks
The rate of return required by stockholders on a firm's common stock.
Costly Trade Credit
Credit taken in excess of free trade credit, whose cost is equal to the discount lost.
Country Risk
The risk that arises from investing or doing business in a particular country.
Coupon Interest Rate
The stated annual rate of interest on a bond.
Coupon Payment
The specified number of dollars of interest paid each period, generally each six months.
Credit Period
The length of time for which credit is granted.
Credit Policy
A set of decisions that include a firm's credit period, credit standards, collection procedures, and discounts offered.
Credit Standards
Standards that stipulate the required financial strength that an applicant must demonstrate to granted credit.
Credit Terms
A statement of the credit period and any discounts offered--for example, 2/10, net 30.
Crossover Rate
The discount rate at which the NPV profiles of two projects cross and, thus, at which the projects' NPV's are equal .
Cumulative
A protective features on preferred dividends previously not paid to be paid before any common dividends can be paid.
Current Ratio
This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to which current liabilities are covered by those assets expected to be converted to cash in the near future.
Current Yield
The annual interest payment on a bond divided by the bond's current price.


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