Business Finance Terms

Acquisition – the purchase of one company by another business entity.
Acquisition of Assets – an acquirer purchases the selling company’s assets.
Acquisition of Stock – an acquirer purchases the capital stock of the target company.
Additional Paid-in Capital – amount paid for stock over and above its par value
Amortization – recognition as an expense of part of an intangible asset’s cost during each period of its useful life
Basis Point – the smallest measure used for quoting interest yields.
Blue Sky Laws – state laws covering the issue and trading of securities.
Bond – a debt issued for a period of more than a year.
Book Value – a company’s total assets minus intangible assets and liabilities.
Break-Even – the level of revenues and expenses at which a project would make zero profit.
Bullet Loan – a term loan that calls for no amortization and a lump sum payment at maturity.
Capital Budget – a company’s plan for capital expenditures (acquisition of fixed assets).
Capital Expenditures – money used to acquire or improve fixed assets.
Capital Stock – stock authorized by a firm’s charter.
Capitalization – the debt and equity combination that funds a company’s assets.
Cash and Equivalents – assets that can be converted into cash immediately.
Cash Flow Coverage Ratio – the ratio of financial obligations to earnings before interest, taxes, depreciation and amortization.
Cash Flow From Operations – a company’s net cash flow resulting directly from its regular operations.
CDO – Collateralized Debt Obligation – security backed by a pool of bonds, loans or other assets containing different types of credit risk with each tranche having a different maturity and risk associated with it
CLO – Collateralized Loan Obligation – securities collateralized by bank commercial loan portfolios
CMO – Collateralized Mortgage Obligation – a mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities and risk levels
Collateral – assets which can be repossessed in the event of default on a loan.
Commitment Fee – a fee paid to a financial institution in return for its commitment to lend funds that have not yet been advanced.
Common Stock Equivalents – securities that can be converted into common stock
Compensating Balance – excess balances left in a bank account to provide indirect compensation for loans or services.
Compound Interest – Interest paid on previously earned interest as well as on the principal.
Consolidation – the joining of two or more companies to form a new company.
Covenants – conditions agreed to in debt agreements designed to protect the lender’s interests
Corporation – a legal entity which is separate and distinct from its owners, and can own assets, incur liabilities, and issue stock.
Coverage Ratio – a formula used to assess the adequacy of cash flow generated through earnings for the purposes of meeting debt and lease obligations.
Current Assets – assets that could be converted to cash in less than a year.
Current Liabilities – salaries, interest, accounts payable and other debts due within one year.
Current Ratio – a measure of debt paying ability, current assets divided by current liabilities.
Debt to Equity Ratio – total debt divided by stockholders’ equity – a gauge of leverage and ability to repay obligations
Deferred Revenue - liability arising upon the prepayment for goods or services yet to be delivered
Depreciation – the charge to amortize the cost of long-term assets over the useful life of the assets.
Derivative – financial contract whose value is determined by fluctuations in value of the underlying assets and is generally used as an instrument to hedge risk
Discounting – calculating the present value of a future amount.
E.B.I.T. - Earnings Before Interest and Taxes.
E.B.I.T.D.A. – Earnings Before Interest, Taxes, Depreciation and Amortization.
EDGAR – Electronic Data Gathering and Exchange accesses S.E.C filings to investors.
Equity Kicker – warrants issued in conjunction with privately placed debt.
FIFO – First In, First Out – method of valuing inventory where goods first purchased/manufactured are treated as the first sold
GAAP – Generally Accepted Accounting Principles – standards, conventions, and rules to record, summarize financial transactions and prepare issued by the American Institute of Certified Public Accountants
General Partner – a partner who has unlimited liability for the obligation of a partnership.
General Partnership – a partnership in which all partners are general partners.
I.P.O. – Initial Public Offering. A company’s first sale of stock to the public.
Insolvency Risk – the risk that a company will not be able to satisfy its debts.
Insolvent – a firm whose liabilities are greater than its debts.
Intangible asset - goodwill, intellectual property, patents, copyrights, trademarks, etc.
Interest – the price paid for borrowing money.
LIFO – Last In, First Out – method of valuing inventory where goods most recently purchased/manufactured are treated as first sold
Line of Credit – short-term credit available to businesses from banks
Liquid Asset - an asset that is easily converted into cash.
L.I.B.O.R. – the London Interbank Offered Rate of interest that international banks in London charge each other for borrowing money.
Long-Term Debt – a debt with a maturity of more than one year.
Management Buyout – a leveraged buyout in which the acquiring group is led by the company’ s management.
Management Fee – the fee charged by the management company to an investment fund based on the fund’s average assets.
Marketable Securities – instruments that can readily be converted into cash
Merger – the combination of two companies.
Mortgage – debt instrument for the purchase of property and collateralized by the property
Net Worth / Stockholders’ Equity – includes common stock, surplus and retained earnings.
NOL – Net Operating Loss – excess of business expenses over revenues in a tax year
NOL Carryforward – amount from prior tax years available to offset taxable income in current or future years
Offering Memorandum – a document that outlines the terms of securities to be offered in a private placement.
Operating Cash Flow – earnings before depreciation minus taxes.
Par Value – stated value of a share of stock – usually a minimal value
Perquisites – personal benefits such as a company car, expense account, office decor, etc.
PP&E – Property, Plant and Equipment – fixed assets with a useful life greater than one year
Present Value – the current value of cash to be received in the future.
Prime Rate – the interest rate at which banks lend money to their best customers.
Principal - the total amount of a loan.
Private Placement – the sale of a bond or security directly to a limited number of investors.
Pro Forma Financial Statements – financial statements which have been adjusted to reflect future events.
Quick Ratio – a calculation of a company’s financial strength and liquidity – determined by subtracting inventories from total current assets and dividing by current liabilities.
Replacement Cost – the cost of replacing a company’s assets.
Reserve – an accounting entry that properly reflects contingent liabilities.
Restrictive Covenant - an agreement placing constraints on the operations of a borrower.
Retained Earnings – earnings retained by a company for reinvestment in its operations rather than paid out as of dividends.
Return on Assets (R.O.A.) – an indicator of profitability, determined by dividing net income by total average assets.
Return on Equity (R.O.E.) – indicator of profitability, calculated by dividing net income by average common stockholder equity.
Secured Debt – debt which is covered by specific assets in the event of a default.
Senior Debt – debt which has a priority claim on the assets of a company.
Subordinated Debt - a debt whose holders have a claim on the company’s assets only after senior debtholders claims have been satisfied.
Tangible Asset – An asset that represents a physical object such as land, furniture, equipment and buildings
Target Firm – a company which is has been identified as a candidate for acquisition by another company.
Term Loan – a bank loan for a specified amount with repayment schedule, often at a floating interest rate and a maturation date from one and ten years.
Treasury Stock – stock reacquired by the issuer that has not been retired and is available for sale
Unsecured Debt – debt which is not covered by specific assets in the event of a default.
Useful Life – estimate of the period of time an asset will be in use
Warrant - a security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price.
Yield - the percentage rate of return paid on an investment.
Z-Score – calculates the probability of business failure of a company bankruptcy based on a formula derived by Dr. Edward Altman
Zero Coupon Bond – a bond in which the principal and interest are paid at the maturity date rather than in increments over the life of the contract.