Corporate Finance Terminology Glossary

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.

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.

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.

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.

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.

Depreciation - the charge to amortize the cost of long-term assets over the useful life of the assets.

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.

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.

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.

Merger - the combination of two companies.

Net Worth / Stockholders' Equity - includes common stock, surplus and retained earnings.

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.

Perquisites - personal benefits such as a company car, expense account, office decor, etc.

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.

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.

Unsecured Debt - debt which is not covered by specific assets in the event of a default.

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.

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.