(Mberiah Only) FIN301: The Role of the Financial Manager

Module 1 - Terms

The Role of the Financial Manager

Course Terms

The following financial terms may be useful in understanding corporate finance. Additional terms will be added to each Module. By course end, each of you will have built a basic financial vocabulary.

American Depository Receipt (ADR): A security issued in the United States representing shares of a foreign stock and allowing that stock to be traded in the United States.

Balance Sheet: A financial statement showing a firm's accounting value at the close of business on a particular point in time.

Benefit/Cost Ratio: The present value of an investment's future cash flows divided by its initial cost. Also called "profitability index."

Beta Coefficient: The amount of systematic risk present in a particular risky asset relative to an average risky asset.

Business Risk: The equity risk that comes from the nature of the firm's operating activities.

Capital Budgeting: The process of planning and managing a firm's long-term investments.

Capital Intensity Ratio: A firm's total assets divided by its sales, or the amount of assets needed to generate US $1 in sales.

Capital Rationing: The situation that exists if a firm has positive net present value projects but cannot find the necessary financing.

Capital Structure: The mixture of debt and equity maintained by a firm.

Cash Budget: A forecast of cash receipts and disbursements for the next planning period. Can be prepared for as little as a week or for as long as five years.

Contingency Planning: Taking into account the managerial options implicit in a project.

Cost of Capital: The minimum require return on a new investment.

Cost of Debt: The return that lenders require on the firm's debt.

Cost of Equity: The return that equity investors require on their investment in the firm.

Discount: Calculate the present value of some future amount.

Discount Rate: The rate used to calculate the present value of future cash flows.

Discounted Cash Flow (DCF) Valuation: The process of evaluating an investment by discounting its future cash inflows to the present.

Economic Order Quantity (EOQ): The restocking quantity that minimizes the total inventory costs.

Economic Value Added (EVA): EVA is a tool for maximizing shareholder wealth. It is a method of measuring financial performance.

Exchange Rate: The price of one country's currency expressed in terms of another country's currency.

Exchange Rate Risk: The risk related to having international operations in a world where relative currency values vary.

Expected Return: Return on a risky asset expected in the future.

Financial Ratios: Relationships determined from a firm's financial information and used for comparison purposes.

Financial Risk: The equity risk that comes from the financial policy (i.e., capital structure) of the firm.

Forecasting Risk: The possibility that errors in projected cash flows lead to incorrect decisions.

Future Value (FV): The amount that an investment is worth after one or more periods.

Generally Accepted Accounting Principles (GAAP): The common set of standards and procedures by which audited financial statements are prepared. Each country's GAAP may differ.

Income Statement: Financial Statement summarizing a firm's performance over a period of time.

Incremental Cash Flows: The difference between a firm's future cash flows with a project or without the project.

Initial Public Offering (IPO): A company's first equity issue made available to the general public.

Internal Rate of Return (IRR): the discount rate that makes the net present value (NPV) of an investment zero.

Just-in-Time (JIT) Inventory: A system for managing demand-dependent inventories that minimizes inventory holdings.

Marginal Tax Rate: Amount of tax payable on the next dollar earned.

Net Present Value (NPV): The difference between an investment's market value and its cost.

Net Working Capital: Current assets less current liabilities.

Operating Cash Flow: Cash generated from a firm's normal business activities.

Opportunity Cost: The most valuable alternative that is given up if a particular investment is undertaken.

Payback Period: The amount of time required for an investment to generate cash flows equal to its initial cost.

Political Risk: Risk related to changes in value that arise because of political actions.

Present Value (PV): The current value of future cash flows discounted at the appropriate discount rate.

Profitability Index (PI): the present value of an investment's future cash flows divided by its initial cost.

Pro Forma Financial Statements: Financial statements projecting future years' operations.

Purchasing Power Parity (PPF): The idea that exchange rate adjusts to keep purchasing power constant among currencies.

Risk Premium: The excess required from an investment in a risky asset over a risk-free investment.

Sensitivity Analysis: Investigation of what happens to net present value (NPV) when only one variable is changed.

Sources of Cash: A firm's activities that generate cash.

Statement of Cash Flows: A firm's financial statement that summarizes its sources and uses of cash over a specified period, usually one fiscal year.

Sunk Cost: A cost that has already been incurred and cannot be removed and, therefore, should not be considered in an investment decision.

Uses of Cash: A firm's activities in which cash is spent.

Variance: The difference between the forecasted amount and the actual amount.

Weighted Average Cost of Capital (WACC): The weighted average cost of equity and the after-tax cost of debt.

Working Capital: A firm's short-term assets and liabilities.

Zero Base Budgeting: A system whereby each manager must justify his/her budget above the amount necessary to operate the function.