Introduction to Corporate Finance

Glossary

G–8

into shares of a company other than

the company that issued the bonds.

ex-dividend date Date on or after

which a purchaser of a share does not

receive the current dividend, usually

two business days prior to the date of

record.

executive compensation

plans Incentives offered to a

manager to encourage her to act in

the best interests of the owners.

exercise price The price at which

an option holder can buy or sell the

underlying asset.

exercise the option Pay (receive)

the strike price and buy (sell) the

underlying asset.

expectations theory In equilibrium,

investors should expect to earn the

same return whether they invest in

long-term Treasury bonds or a series

of short-term Treasury bonds.

expected return A forecast of the

return that an asset will earn over

some future period of time.

expiration date The date on which the

right to buy or to sell the underlying

asset expires.

external financing Raising money from

sources external to the firm, such as

banks or capital markets.

external funds required (EFR) The

expected shortage or surplus of

financial resources, given the

company’s growth objectives.

extra dividend, or special dividend An

additional dividend that a company

may pay if earnings are higher than

normal in a given period.

F

face value (bonds) The nominal value

of a bond, which the borrower repays

at maturity. Also called par value.

factoring The outright sale of

receivables to a third-party factor at a

discount.

fallen angels Bonds that received

investment-grade ratings when first

issued but later fell to junk status.

fiduciary A person or institution

who invests and manages money on

another’s behalf.

finance lease A non-cancellable

contractual arrangement, whereby

the lessee agrees to make periodic

payments to the lessor, typically for

more than five years, to obtain an

asset’s services.

financial deficit Occurs when a

corporation requires more financial

capital for investment than it supplies

in the form of retained earnings.

financial distress The situation

in which a company’s cash flows

are insufficient to pay its current

obligations.

financial engineering The application

of finance principles to design

securities and strategies that help

companies manage their risk

exposures.

financial intermediary (FI) An

institution, such as a bank, that raises

capital by issuing liabilities against

itself, and then uses the capital raised

to make either loans to companies

and individuals or to buy various types

of investments.

financial leverage The magnification

of both risk and expected return that

results from the fixed cost associated

with the use of debt. As a result, it

leads to a higher equity beta.

financial management function The

activities involved in managing the

company’s operating cash flows as

efficiently as possible.

financial risk How a company’s

financing choices affect how its

business risk is distributed to its

shareholders and bondholders.

financial risk management The

process of identifying, measuring and

managing all types of risk exposures,

including interest rate, commodity

and currency risk exposures.

financial slack Large cash and

marketable security holdings in

addition to its unused debt capacity.

financial venture capital

funds Subsidiaries of financial

institutions, particularly commercial

banks.

financing flows Cash flows that result

from debt and equity financing

transactions.

financing function Raising capital to

support a company’s operations and

investment programs.

firm A term generally used by

economists to refer to a non-

governmental entity that employs

tangible or intangible resources as

inputs to create outputs, representing

a form of production function. In

economics, a firm is often assumed

to have a goal of maximising profits.

In Australia, a firm is usually called a

company.

firm-commitment offering An offering

in which the investment bank

agrees to underwrite the company’s

securities, thereby guaranteeing

that the company will successfully

complete its sale of securities.

five Cs of credit A framework for

performing in-depth credit analysis

without providing a specific accept or

reject decision.

fixed asset turnover A measure of the

efficiency with which a company uses

its fixed assets, calculated by dividing

sales by the number of dollars of net

fixed asset investment.

fixed exchange rate An exchange rate

system in which the price of one

currency is fixed relative to another

currency by government authorities.

fixed-for-floating currency swap A

combination of a currency swap and

an interest rate swap.