agency problem The possibility of conflicts of interest between the stockholders and
management of a firm.
capital budgeting The process of planning and managing a firm's investment in long-term
capital markets Financial markets where long-term debt and equity securities are bought and
capital structure The mix of debt and equity maintained by a firm.
corporate Rules for corporate organization and conduct; rules and practices relating to
governance how corporations are governed by management, directors, and shareholders.
corporation A business created as a distinct legal entity owned by one or more individuals
derivative securities Securities whose returns depend on the price of an underlying asset and that
allow market participants to offset the exposure of their cash market
financial Creation of new securities or financial processes.
money markets Financial markets where short-term debt securities are bought and sold.
partnership A business formed by two or more co-owners.
regulatory dialectic The pressures financial institutions and regulatory bodies exert on each other.
sole proprietorship A business owned by a single individual.
working capital Planning and managing the firm's current assets and liabilities.
average tax rate Total taxes paid divided by total taxable income.
balance sheet Financial statement showing a firm's accounting value on a particular date.
capital cost allowance Depreciation method under Canadian tax law allowing for the accelerated
(CCA) write-off of property under various classifications.
capital gains The increase in value of an investment over its purchase price.
cash flow from assets The total of cash flow to bondholders and cash flow to stockholders,
consisting of the following: operating cash flow, capital spending, and
additions to net working capital.
cash flow to creditors A firm's interest payments to creditors less net new borrowings.
cash flow to Dividends paid out by a firm less net new equity raised.
dividend tax credit Tax formula that reduces the effective tax rate on dividends.
free cash flow Another name for cash flow from assets.
generally accepted The common set of standards and procedures by which audited financial accounting principles statements are prepared.
half-year rule CCRA's requirement to figure CCA on only one half of an asset's installed
cost for its first year of use.
income statement Financial statement summarizing a firm's performance over a period of
loss carry-forward, Using a year's capital losses to offset capital gains in past or future years.
marginal tax rate Amount of tax payable on the next dollar earned.
net acquisitions Total installed cost of capital acquisitions minus adjusted cost of any
disposals within an asset pool.
non-cash items Expenses charged against revenues that do not directly affect cash flow,
such as depreciation.
operating cash flow Cash generated from a firm's normal business activities.
realized capital gains The increase in value of an investment converted to cash.
recaptured The taxable difference between adjusted cost of disposal and UCC when
depreciation UCC is greater.
terminal loss The difference between UCC and adjusted cost of disposal when UCC is
common-base-yearA standardized financial statement presenting all items relative to a certain base
statement year amount.
common-size A standardized financial statement presenting all items in percentage terms.
statement Balance sheets are shown as a percentage of assets and income statements as a
percentage of sales.
Du Pont identity Popular expression breaking ROE into three parts: profit margin, total asset
turnover, and financial leverage.
sources of cash A firm's activities that generate cash.
statement of cash A firm's financial statement that summarizes its sources and uses of cash over a
flows specified period.
uses of cash A firm's activities in which cash is spent. Also applications of cash.
aggregation Process by which smaller investment proposals of each of a firm's
operational units are added up and treated as one big project.
capital intensity ratio A firm's total assets divided by its sales, or the amount of assets needed to
generate $1 in sales.
debt capacity The ability to borrow to increase firm value.
dividend payout ratio Amount of cash paid out to shareholders divided by net income. internal growth rate The growth rate a firm can maintain with only internal financing.
percentage of sales Financial planning method in which accounts are projected depending on a
approach firm's predicted sales level.
planning horizon The long-range time period the financial planning process focuses on,
usually the next two to five years.
retention ratio or Retained earnings divided by net income. Also called the plowback ratio.
sustainable growth The growth rate a firm can maintain given its debt capacity, ROE, and
rate retention ratio.
compound Interest earned on both the initial principal and the interest reinvested from
interest prior periods.
compounding The process of accumulating interest in an investment over time to earn more
discount Calculate the present value of some future amount.
discount rate The rate used to calculate the present value of future cash flows.
future value (FV) The amount an investment is worth after one or more periods. Also compound
interest on Interest earned on the reinvestment of previous interest payments.
present value The current value of future cash flows discounted at the appropriate discount
simple interest Interest earned only on the original principal amount invested.
annual percentage rate The interest rate charged per period multiplied by the number of periods
(APR) per year.
annuity A level stream of cash flows for a fixed period of time.
annuity due Annuity contract specification of payments at the beginning of each period.
consol A perpetual bond.
effective annual rate The interest rate expressed as if it were compounded once per year.
growing annuity A finite number of growing annual cash flows.
growing perpetuity A constant stream of cash flows without end that is expected to rise
perpetuity An annuity in which the cash flows continue forever.
stated or quoted The interest rate expressed in terms of the interest payment made each
interest rate period. Also quoted interest rate. CHAPTER 7
bearer form Bond issued without record of the owner's name; payment is made to
whoever holds the bond.
bond refunding The process of replacing all or part of an issue of outstanding bonds.
call premium Amount by which the call price exceeds the par value of the bond.
call protected Bond during period in which it cannot be redeemed by the issuer.
call provision Agreement giving the corporation the option to repurchase the bond at a
specified price before maturity.
Canada plus call Call provision which compensates bond investors for interest differential
making call unattractive for issuer.
Canada yield curve A plot of the yields on Government of Canada bonds relative to maturity.
coupon rate The annual coupon divided by the face value of a bond.
coupons The stated interest payments made on a bond.
debenture Unsecured debt, usually with a maturity of 10 years or more.
default risk premium The portion of a nomi