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Principles of Finance Exam I
For Besley
89
Finance
Undergraduate 3
09/18/2013

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Term
proprietorship
Definition
an incorporated business owned by one individual
Term
partnership
Definition
An unincorporated business owned by two or more persons.
Term
corporation
Definition
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.
Term
corporate charter
Definition
A document filed with the secretary of the state in which a business is incorporated that provides information about the company, including its name, address, directors, and amount of capital stock.
Term
bylaws
Definition
A set of rules drawn up by the founders of the corporation that indicates how the company is to be governed; includes procedures for electing directors, rights of stockholders, and how to change the bylaws when necessary.
Term
limited liability partnership (llp)
Definition
A partnership wherein at least one partner is designated as a general partner with unlimited personal financial liability, and the other partners are limited partners whose liability is limited to amounts they invest in the firm.
Term
limited liability company (llc)
Definition
Offers the limited personal liability associated with a corporation; however the company's income is taxed like that of a partnership.
Term
s corporation
Definition
A corporation with no more than 100 stockholders that elects to be taxed in the same way as proprietorships and partnerships, so that business income is only taxed once.
Term
stockholder wealth maximization
Definition
The appropriate goal for management decisions; considers the risk and timing associated with expected cash flows to maximize the price of the firm's common stock.
Term
value
Definition
The present, or current, value of the cash flows that an asset is expected to generate in the future.
Term
agency problem
Definition
A potential conflict of interest between outside shareholders and managers who make decisions about how to operate the firm.
Term
hostile takeover
Definition
The acquisition of a company over the opposition of its management.
Term
business ethics
Definition
A company's attitude and conduct toward its stakeholders (employees, customers, stockholders, and community). Ethical behavior requires fair and honest treatment of all parties.
Term
corporate governance
Definition
Deals with the set of rules that a firm follows when conducting business; these rules identify who is accountable for major financial decisions.
Term
stakeholders
Definition
Those who are associated with a business; stakeholders include managers, employees, customers, suppliers, creditors, stockholders, and other parties with an interest in the firm's well-being.
Term
proxy voters
Definition
Voting power that is assigned to another party, such as another stockholder or institution.
Term
industrial groups
Definition
Organizations comprised of companies in different industries with common ownership interests, which include firms necessary to manufacture and sell products—a network of manufacturers, suppliers, marketing organizations, distributors, retailers, and creditors.
Term
multinational companies
Definition
Firms that operate in two or more countries.
Term
exchange rates
Definition
The prices at which the currency from one country can be converted into the currencies of other countries.
Term
annual report
Definition
A report issued by a corporation to its stockholders that contains basic financial statements, as well as the opinions of management about the past year's operations and the firm's future prospects.
Term
balance sheet
Definition
A statement that shows the firm's financial position—assets and liabilities and equity—at a specific point in time.
Term
common stockholders' equity
Definition
The funds provided by common stockholders—common stock, paid-in capital, and retained earnings.
Term
common size balance sheet
Definition
Dollar amounts on the balance sheet are stated as a percent of total assets.
Term
retained earnings
Definition
The portion of the firm's earnings that has been reinvested in the firm rather than paid out as dividends.
Term
book values
Definition
Amounts reported in financial statements—accounting numbers.
Term
market value
Definition
Values of items—asset, liability, and equity—in the marketplace outside the firm.
Term
income statement
Definition
A statement summarizing the firm's revenues and expenses over an accounting period, generally a quarter or a year.
Term
operating cash flows
Definition
Those cash flows that arise from normal operations; the difference between cash collections and cash expenses associated with the manufacture and sale of inventory.
Term
accounting profits
Definition
A firm's net income as reported on its income statement.
Term
statement of cash flows
Definition
A statement that reports the effects of a firm's operating, investing, and financing activities on cash flows over an accounting period.
Term
statement of retained earnings
Definition
A statement reporting the change in the firm's retained earnings as a result of the income generated and retained during the year. The balance sheet figure for retained earnings is the sum of the earnings retained for each year that the firm has been in business.
Term
liquid asset
Definition
An asset that can be easily converted into cash without significant loss of the amount originally invested.
Term
liquid ratios
Definition
Ratios that show the relationship of a firm's cash and other current assets to its current liabilities; they provide an indication of the firm's ability to meet its current obligations.
Term
asset management ratios
Definition
A set of ratios that measures how effectively a firm is managing its assets.
Term
financial leverage
Definition
the use of debt financing
Term
debt management ratios
Definition
Ratios that provide an indication of how much debt the firm has and whether the firm can take on more debt.
Term
profitability ratios
Definition
A group of ratios showing the effect of liquidity, asset management, and debt management on operating results.
Term
market value ratios
Definition
A set of ratios that relate the firm's stock price to its earnings and book value per share.
Term
comparative ratio analysis
Definition
An analysis based on a comparison of a firm's ratios with those of other firms in the same industry.
Term
trend analysis
Definition
An evaluation of changes (trends) in a firm's financial position over a period of time, perhaps years.
Term
"window dressing" techniques
Definition
Techniques employed by firms to make their financial statements look better than they actually are.
Term
financial markets
Definition
A system consisting of individuals and institutions, instruments, and procedures that bring together borrowers and savers.
Term
economic efficiency
Definition
Funds are allocated to their optimal use at the lowest costs in the financial markets.
Term
informational efficiency
Definition
The prices of investments reflect existing information and adjust quickly when new information enters the markets.
Term
abnormal return
Definition
Return that exceeds what is justified by the risk associated with the investment.
Term
money markets
Definition
The segments of the financial markets where the instruments that are traded have maturities equal to one year or less.
Term
capital markets
Definition
The segments of the financial markets where the instruments that are traded have maturities greater than one year.
Term
debt markets
Definition
Financial markets where loans are traded.
Term
equity markets
Definition
Financial markets where corporate stocks are traded.
Term
primary markets
Definition
Markets in which various organizations raise funds by issuing new securities.
Term
secondary markets
Definition
Markets where financial assets that have previously been issued by various organizations are traded among investors.
Term
derivatives markets
Definition
Financial markets where options and futures are traded.
Term
initial public offering (ipo) market
Definition
Market consisting of stocks of privately held companies that have recently gone public for the first time.
Term
physical stock exchanges
Definition
Formal organizations with physical locations that facilitate trading in designated (“listed”) securities. The major U.S. stock exchange is the New York Stock Exchange (NYSE).
Term
listing requirements
Definition
characteristics a firm must possess to be listed on a stock exchange.
Term
over-the-counter (otc) market
Definition
A collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in securities not listed on the physical stock exchanges.
Term
securities and exchange commission (sec)
Definition
The U.S. government agency that regulates the issuance and trading of stocks and bonds.
Term
dual listing
Definition
When stocks are listed for trading in more than one stock market.
Term
investment banker
Definition
An organization that underwrites and distributes new issues of securities; it helps businesses and other entities obtain needed financing.
Term
underwritten agreement
Definition
Agreement for the sale of securities in which the investment bank guarantees the sale by purchasing the securities from the issuer, thus agreeing to bear any risks involved in the transaction.
Term
best-efforts agreement
Definition
Agreement for the sale of securities in which the investment bank handling the transaction gives no guarantee that the securities will be sold.
Term
flotation costs
Definition
The costs associated with issuing new stocks or bonds.
Term
registration statement
Definition
A statement of facts filed with the SEC about a company that plans to issue securities.
Term
prospectus
Definition
A document describing a new security issue and the issuing company.
Term
underwriting syndicate
Definition
A group of investment banking firms formed to spread the risk associated with the purchase and distribution of a new issue of securities.
Term
shelf registration
Definition
Registration of securities with the SEC for sale at a later date. The securities are held “on the shelf” until the sale.
Term
financial intermediaries
Definition
Organizations that create various loans and investments from funds provided by depositors.
Term
time value of money (tvm)
Definition
The principles and computations used to revalue cash payoffs from different times so they are stated in dollars of the same time period.
Term
opportunity cost rate
Definition
The rate of return on the best available alternative investment of equal risk.
Term
lump-sum amount
Definition
A single payment (received or made) that occurs either today or at some date in the future.
Term
annuity
Definition
A series of payments of an equal amount at fixed, equal intervals for a specified number of periods.
Term
ordinary annuity
Definition
An annuity with payments that occur at the end of each period.
Term
annuity due
Definition
An annuity with payments that occur at the beginning of each period.
Term
uneven cash flows
Definition
Multiple payments of different amounts over a period of time.
Term
future value (fv)
Definition
The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate.
Term
compounding
Definition
The process of determining to what value an amount or a series of cash flows will grow in the future when compound interest is applied.
Term
payment (pmt)
Definition
This term designates constant cash flows—that is, the amount of an annuity payment.
Term
cash flows (cf)
Definition
This term designates cash flows in general, including uneven cash flows.
Term
terminal value
Definition
The future value of a cash flow stream.
Term
present value (pv)
Definition
today—that is, the current value—of a future cash flow or series of cash flows.
Term
discounting
Definition
The process of determining the present value of a cash flow or a series of cash flows received (paid) in the future; the reverse of compounding.
Term
perpetuities
Definition
Streams of equal payments that are expected to continue forever.
Term
annual compounding
Definition
The process of determining the future (or present) value of a cash flow or series of cash flows when interest is paid once per year.
Term
semiannual compounding
Definition
The process of determining the future (or present) value of a cash flow or series of cash flows when interest is paid twice per year.
Term
simple (quoted) interest rate
Definition
The rate, quoted by borrowers and lenders, that is used to determine the rate earned per compounding period (periodic rate, rPER).
Term
annual percentage rate (apr)
Definition
Another name for the simple interest rate, rSIMPLE; does not consider the effect of interest compounding.
Term
effective annual rate
Definition
The annual rate of interest actually being earned, as opposed to the quoted rate; considers the compounding of interest.
Term
amortized loan
Definition
A loan that requires equal payments over its life; the payments include both interest and repayment of the debt.
Term
amortization schedule
Definition
A schedule showing precisely how a loan will be repaid. It gives the payment required on each payment date and a breakdown of the payment, showing how much is interest and how much is repayment of principal.
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