Corporate Finance Terms by Category
Corporate Finance: A Brief Overview
Corporate finance is the financial management of a company. It involves decisions related to how a company acquires funds (financing) and how it allocates those funds (investing). The goal of corporate finance is to maximize shareholder value.
Key Areas of Corporate Finance:
Financial Planning and Analysis:
- Forecasting future financial needs and performance.
- Analyzing financial statements and ratios.
- Developing financial models.
Working Capital Management:
- Managing current assets (cash, inventory, accounts receivable) and current liabilities (accounts payable, notes payable).
- Optimizing cash flow and reducing costs.
Capital Budgeting:
- Evaluating investment opportunities.
- Determining the profitability of projects.
- Making decisions about capital expenditures.
Risk Management:
- Identifying and managing financial risks.
- Using tools like hedging and insurance.
Financial Structure:
- Determining the optimal mix of debt and equity financing.
- Managing capital structure to minimize the cost of capital.
Common Corporate Finance Decisions:
- Investment decisions: Should the company invest in a new project or expand existing operations?
- Financing decisions: Should the company raise funds through debt or equity?
- Dividend decisions: How much of the company's profits should be distributed to shareholders as dividends?
In essence, corporate finance is about making sound financial decisions to ensure the long-term success and profitability of a company.
Note: This table provides a basic overview of key terms in corporate finance.
| Category | Term | Definition |
|---|---|---|
| Capital Budgeting | NPV | Net Present Value: The difference between the present value of cash inflows and the present value of cash outflows. |
| IRR | Internal Rate of Return: The discount rate that makes the NPV of a project equal to zero. | |
| Payback Period | The length of time required to recover the initial investment in a project. | |
| Profitability Index | The ratio of the present value of future cash flows to the initial investment. | |
| Capital Structure | Debt | A company's obligations to pay back creditors. |
| Equity | Ownership stake in a company. | |
| WACC | Weighted Average Cost of Capital: The average cost of a company's financing. | |
| Capital Asset Pricing Model (CAPM) | A model used to determine the expected return on an investment. | |
| Working Capital Management | Inventory Management | The process of managing inventory levels. |
| Accounts Receivable Management | The process of managing customer payments. | |
| Accounts Payable Management | The process of managing payments to suppliers. | |
| Cash Conversion Cycle | The time it takes to convert inventory into cash. | |
| Valuation | Discounted Cash Flow (DCF) | A valuation method that estimates the intrinsic value of an investment by calculating the present value of its future cash flows. |
| Comparable Company Analysis | A valuation method that compares a company's valuation multiples to those of similar companies. | |
| Precedent Transactions | A valuation method that analyzes the prices paid for similar companies in recent acquisitions. | |
| Risk Management | Hedging | Investing in financial instruments to offset potential losses from fluctuations in asset prices. |
| Derivatives | Financial contracts whose value is derived from an underlying asset. | |
| Diversification | Investing in a variety of assets to reduce risk. |
Capital Budgeting
Term Definition Capital Budgeting The process of evaluating and selecting long-term investments Net Present Value (NPV) The difference between the present value of cash inflows and the present value of cash outflows Internal Rate of Return (IRR) The discount rate that makes the NPV of a project equal to zero Payback Period The length of time required to recover the initial investment in a project Profitability Index The ratio of the present value of future cash flows to the initial investment Discounted Cash Flow (DCF) Analysis A valuation method that estimates the intrinsic value of an investment by calculating the present value of its future cash flows
| Term | Definition |
|---|---|
| Capital Budgeting | The process of evaluating and selecting long-term investments |
| Net Present Value (NPV) | The difference between the present value of cash inflows and the present value of cash outflows |
| Internal Rate of Return (IRR) | The discount rate that makes the NPV of a project equal to zero |
| Payback Period | The length of time required to recover the initial investment in a project |
| Profitability Index | The ratio of the present value of future cash flows to the initial investment |
| Discounted Cash Flow (DCF) Analysis | A valuation method that estimates the intrinsic value of an investment by calculating the present value of its future cash flows |
Capital Budgeting (Continued)
Term Definition Discounted Payback Period The length of time required to recover the initial investment in a project, considering the time value of money Modified Internal Rate of Return (MIRR) An adjusted version of IRR that addresses some of IRR's shortcomings Profitability Index (PI) The ratio of the present value of future cash flows to the initial investment Sensitivity Analysis A technique used to assess how changes in input variables affect project outcomes Scenario Analysis A technique used to evaluate project performance under different economic conditions Capital Rationing The situation where a company has limited funds to invest in available projects
| Term | Definition |
|---|---|
| Discounted Payback Period | The length of time required to recover the initial investment in a project, considering the time value of money |
| Modified Internal Rate of Return (MIRR) | An adjusted version of IRR that addresses some of IRR's shortcomings |
| Profitability Index (PI) | The ratio of the present value of future cash flows to the initial investment |
| Sensitivity Analysis | A technique used to assess how changes in input variables affect project outcomes |
| Scenario Analysis | A technique used to evaluate project performance under different economic conditions |
| Capital Rationing | The situation where a company has limited funds to invest in available projects |
Capital Structure
Term Definition Capital Structure The mix of debt and equity financing a company uses Debt Obligations to repay creditors, including bonds, loans, and other borrowings Equity Ownership stake in a company, including common and preferred stock Weighted Average Cost of Capital (WACC) The average cost of a company's financing, considering the proportion of debt and equity Leverage The use of debt to amplify returns on equity Financial Distress The condition where a company has difficulty meeting its debt obligations Capital Structure Theory Theories explaining how a company should choose its optimal debt-to-equity ratio
| Term | Definition |
|---|---|
| Capital Structure | The mix of debt and equity financing a company uses |
| Debt | Obligations to repay creditors, including bonds, loans, and other borrowings |
| Equity | Ownership stake in a company, including common and preferred stock |
| Weighted Average Cost of Capital (WACC) | The average cost of a company's financing, considering the proportion of debt and equity |
| Leverage | The use of debt to amplify returns on equity |
| Financial Distress | The condition where a company has difficulty meeting its debt obligations |
| Capital Structure Theory | Theories explaining how a company should choose its optimal debt-to-equity ratio |
Working Capital Management
Term Definition Working Capital Current assets minus current liabilities Net Working Capital Current assets minus current liabilities Operating Cycle The time it takes to convert inventory into cash Cash Conversion Cycle The time it takes to convert inventory into cash, less the time it takes to pay suppliers Inventory Management The process of managing inventory levels to balance costs and customer needs Accounts Receivable Management The process of managing customer payments to minimize bad debts and optimize cash flow Accounts Payable Management The process of managing payments to suppliers to optimize cash flow and maintain good supplier relationships
| Term | Definition |
|---|---|
| Working Capital | Current assets minus current liabilities |
| Net Working Capital | Current assets minus current liabilities |
| Operating Cycle | The time it takes to convert inventory into cash |
| Cash Conversion Cycle | The time it takes to convert inventory into cash, less the time it takes to pay suppliers |
| Inventory Management | The process of managing inventory levels to balance costs and customer needs |
| Accounts Receivable Management | The process of managing customer payments to minimize bad debts and optimize cash flow |
| Accounts Payable Management | The process of managing payments to suppliers to optimize cash flow and maintain good supplier relationships |
Valuation
Term Definition Valuation The process of determining the fair market value of a company or asset Discounted Cash Flow (DCF) Analysis A valuation method that estimates the intrinsic value of an investment by calculating the present value of its future cash flows Comparable Company Analysis (CCA) A valuation method that compares a company's valuation multiples to those of similar companies Precedent Transactions A valuation method that analyzes the prices paid for similar companies in recent acquisitions Enterprise Value (EV) The total value of a company, including both debt and equity Equity Value The value of a company's equity Valuation Multiples Ratios used in comparable company analysis, such as price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA)
| Term | Definition |
|---|---|
| Valuation | The process of determining the fair market value of a company or asset |
| Discounted Cash Flow (DCF) Analysis | A valuation method that estimates the intrinsic value of an investment by calculating the present value of its future cash flows |
| Comparable Company Analysis (CCA) | A valuation method that compares a company's valuation multiples to those of similar companies |
| Precedent Transactions | A valuation method that analyzes the prices paid for similar companies in recent acquisitions |
| Enterprise Value (EV) | The total value of a company, including both debt and equity |
| Equity Value | The value of a company's equity |
| Valuation Multiples | Ratios used in comparable company analysis, such as price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA) |
Risk Management
Term Definition Risk Management The process of identifying, assessing, and controlling risks Risk Identification The process of identifying potential risks that could impact a company Risk Assessment The process of evaluating the likelihood and potential impact of identified risks Risk Mitigation The process of developing strategies to reduce the impact or probability of risks Risk Transfer Shifting the risk to a third party, such as through insurance Risk Avoidance Eliminating or avoiding activities that pose a risk Risk Acceptance Accepting the risk and allocating resources to deal with its consequences
| Term | Definition |
|---|---|
| Risk Management | The process of identifying, assessing, and controlling risks |
| Risk Identification | The process of identifying potential risks that could impact a company |
| Risk Assessment | The process of evaluating the likelihood and potential impact of identified risks |
| Risk Mitigation | The process of developing strategies to reduce the impact or probability of risks |
| Risk Transfer | Shifting the risk to a third party, such as through insurance |
| Risk Avoidance | Eliminating or avoiding activities that pose a risk |
| Risk Acceptance | Accepting the risk and allocating resources to deal with its consequences |
Financial Ratios
Category Ratio Definition Liquidity Current Ratio Measures a company's ability to meet short-term obligations Quick Ratio Measures a company's ability to meet short-term obligations without relying on inventory Solvency Debt-to-Equity Ratio Measures the proportion of debt to equity in a company's capital structure Interest Coverage Ratio Measures a company's ability to meet interest payments on its debt Profitability Gross Profit Margin Measures the profitability of a company's core operations Net Profit Margin Measures the proportion of net income to total revenue Return on Equity (ROE) Measures the profitability of a company in relation to shareholders' equity Efficiency Inventory Turnover Ratio Measures how efficiently a company manages its inventory Accounts Receivable Turnover Ratio Measures how efficiently a company collects its receivables Asset Turnover Ratio Measures how efficiently a company uses its assets to generate revenue
| Category | Ratio | Definition |
|---|---|---|
| Liquidity | Current Ratio | Measures a company's ability to meet short-term obligations |
| Quick Ratio | Measures a company's ability to meet short-term obligations without relying on inventory | |
| Solvency | Debt-to-Equity Ratio | Measures the proportion of debt to equity in a company's capital structure |
| Interest Coverage Ratio | Measures a company's ability to meet interest payments on its debt | |
| Profitability | Gross Profit Margin | Measures the profitability of a company's core operations |
| Net Profit Margin | Measures the proportion of net income to total revenue | |
| Return on Equity (ROE) | Measures the profitability of a company in relation to shareholders' equity | |
| Efficiency | Inventory Turnover Ratio | Measures how efficiently a company manages its inventory |
| Accounts Receivable Turnover Ratio | Measures how efficiently a company collects its receivables | |
| Asset Turnover Ratio | Measures how efficiently a company uses its assets to generate revenue |
Dividend Policy
Term Definition Dividend Policy The decisions a company makes regarding dividend payments to shareholders Dividend Payout Ratio The proportion of net income paid out as dividends Dividend Yield The annual dividend per share divided by the stock price Dividend Growth Rate The rate at which dividends are expected to increase over time Stock Dividend A dividend paid in additional shares of stock rather than cash Stock Split An increase in the number of shares outstanding without changing the total equity value Share Repurchase A company's purchase of its own shares
| Term | Definition |
|---|---|
| Dividend Policy | The decisions a company makes regarding dividend payments to shareholders |
| Dividend Payout Ratio | The proportion of net income paid out as dividends |
| Dividend Yield | The annual dividend per share divided by the stock price |
| Dividend Growth Rate | The rate at which dividends are expected to increase over time |
| Stock Dividend | A dividend paid in additional shares of stock rather than cash |
| Stock Split | An increase in the number of shares outstanding without changing the total equity value |
| Share Repurchase | A company's purchase of its own shares |
Mergers and Acquisitions (M&A)
Term Definition Mergers and Acquisitions (M&A) The combination of two or more companies Merger The combination of two companies into a new legal entity Acquisition The purchase of one company by another, where the acquiring company retains its identity Synergy The increase in value created by combining two companies Due Diligence The investigation of a target company before an acquisition Hostile Takeover An acquisition attempt against the wishes of the target company's management Leveraged Buyout (LBO) An acquisition financed primarily with debt
| Term | Definition |
|---|---|
| Mergers and Acquisitions (M&A) | The combination of two or more companies |
| Merger | The combination of two companies into a new legal entity |
| Acquisition | The purchase of one company by another, where the acquiring company retains its identity |
| Synergy | The increase in value created by combining two companies |
| Due Diligence | The investigation of a target company before an acquisition |
| Hostile Takeover | An acquisition attempt against the wishes of the target company's management |
| Leveraged Buyout (LBO) | An acquisition financed primarily with debt |
Financial Markets
Term Definition Financial Markets Platforms where financial assets (stocks, bonds, derivatives, currencies) are created, traded, and priced Primary Market Where securities are issued for the first time (IPO, bond issuance) Secondary Market Where securities are traded after the initial issuance Stock Market A market where shares of publicly traded companies are bought and sold Bond Market A market where debt securities (bonds) are issued and traded Money Market A market for short-term debt instruments (less than a year) Capital Market A market for long-term debt instruments and equity securities Foreign Exchange Market (Forex) A market where currencies are traded Derivatives Market A market for financial instruments whose value is derived from an underlying asset (options, futures)
| Term | Definition |
|---|---|
| Financial Markets | Platforms where financial assets (stocks, bonds, derivatives, currencies) are created, traded, and priced |
| Primary Market | Where securities are issued for the first time (IPO, bond issuance) |
| Secondary Market | Where securities are traded after the initial issuance |
| Stock Market | A market where shares of publicly traded companies are bought and sold |
| Bond Market | A market where debt securities (bonds) are issued and traded |
| Money Market | A market for short-term debt instruments (less than a year) |
| Capital Market | A market for long-term debt instruments and equity securities |
| Foreign Exchange Market (Forex) | A market where currencies are traded |
| Derivatives Market | A market for financial instruments whose value is derived from an underlying asset (options, futures) |
Financial Statement Analysis
Term Definition Financial Statements Formal records of a company's financial activities Income Statement Shows a company's revenues, expenses, and net income over a period Balance Sheet Shows a company's assets, liabilities, and equity at a specific point in time Cash Flow Statement Shows the inflows and outflows of cash during a period Ratio Analysis The process of evaluating a company's financial performance by comparing its ratios to industry averages or historical data Horizontal Analysis Comparing financial data over multiple periods Vertical Analysis Analyzing financial data as a percentage of a base figure (e.g., revenue or total assets)
| Term | Definition |
|---|---|
| Financial Statements | Formal records of a company's financial activities |
| Income Statement | Shows a company's revenues, expenses, and net income over a period |
| Balance Sheet | Shows a company's assets, liabilities, and equity at a specific point in time |
| Cash Flow Statement | Shows the inflows and outflows of cash during a period |
| Ratio Analysis | The process of evaluating a company's financial performance by comparing its ratios to industry averages or historical data |
| Horizontal Analysis | Comparing financial data over multiple periods |
| Vertical Analysis | Analyzing financial data as a percentage of a base figure (e.g., revenue or total assets) |
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Corporate finance