Chapter 3 Vocabulary

Question 1

Company officer responsible for managing a corporations finance function. Oversees all three strategic financial decisions

Answer 1

CFO

Question 2

Corporation officer who handles and monitors a corporations accounting and audit activities

Answer 2

Controller

Question 3

Company officer responsible for managing a corporations finance function

Answer 3

Treasurer

Question 4

The process of managing a company’s investment decisions

Answer 4

Capital budgeting

Question 5

The mixture of financing (debt and equity) a corporation uses to finance its operations

Answer 5

Capital structure

Question 6

The short term assets and liabilities of a corporation

Answer 6

Working capital

Question 7

Return that investors receive for their capital

Answer 7

Shareholder value

Question 8

Interaction between shareholders and management intended to assure that management uses invested capital to maximize shareholder value

Answer 8

Corporate governance

Question 9

A form of business organization owned by one person

Answer 9

Sole proprietorship

Question 10

A company formed by two or more individuals

Answer 10

Partnership

Question 11

A form of business organization where the main characteristics include limited liability, corporate taxes in addition to personal income taxes for owners and ownership is easily transferable

Answer 11

Corporation

Question 12

Where owners are only liable for the amount of cash contributed by each investor

Answer 12

Limited liability

Question 13

Where owners are liable for an amount greater than their investment in the company

Answer 13

Unlimited liability

Question 14

A method of providing return to the shareholders when part of free cash flows generated by the company is distributed to the shareholders

Answer 14

Dividends

Question 15

A method of providing return to the shareholders through buying back corporate stock

Answer 15

Stock buy-back

Question 16

A method of providing return to the shareholders when corporate share price increases

Answer 16

Capital gains

Question 17

Cash flow available for distribution to shareholders after paying all corporate taxes

Answer 17

Free cash flow

Question 18

Net income divided by equity. This ratio measures how efficiently a firm utilized shareholders investment dollars

Answer 18

return on equity

Question 19

A right-but not an obligation-to buy a stock from the company at a fixed price during a specific time period

Answer 19

Stock options

Question 20

When one company purchases a majority interest in the acquired

Answer 20

Acquisition

Question 21

The partial or full disposal of an investment or asset through sale, exchange, closure or bankruptcy. Can be done slowly over a long period or largely over a short period of time

Answer 21

Divestiture

Question 22

A conflict of interest arising between creditors shareholders and management because of differing goals

Answer 22

Agency problem

Question 23

The increase in the number of outstanding shares of stock while making no change in shareholder’s equity

Answer 23

Stock split

Question 24

A company that attempts to acquire another company against the wishes and efforts of management of the target company (launched in 1980s)

Answer 24

Corporate Raiders

Question 25

A takeover attempt that is strongly resisted by the target firm

Answer 25

Hostile takeover

Question 26

A riskier bond that is considered non investment grade by a major rating agency

Answer 26

Junk bond

Question 27

Shareholder’s right to vote on the shareholder meeting

Answer 27

Voting rights

Question 28

Defense mechanism against unwanted takeovers when the board of directors is staggered so that one-fourth of the board members are elected each year and serve a four-year term

Answer 28

Shark repellant

Question 29

Defense mechanism against unwanted takeovers when the target company finds a friendly merger candidate

Answer 29

White-knight

Question 30

Defense mechanism against unwanted takeovers when the target company provides compensation to top-level executives in the event of a change of corporate control

Answer 30

Golden parachute

Question 31

Defense mechanism against unwanted takeovers when the target company employs a counter-takeover bid for the raider

Answer 31

Pac-Man defense

Question 32

Defense mechanism against unwanted takeovers when the target company purchases the acquirers shares at a premium over the market price

Answer 32

Greenmail

Question 33

Defense mechanism against unwanted takeovers when the target company agrees to purchase some of the current outstanding shares from its shareholders, usually at a price above what the acquiring company is offering

Answer 33

Self-tender offer

Question 34

Defense mechanism against unwanted takeovers when the target company gives current shareholders the right to purchase shares of the company at a bargain price contingent on another firm acquiring control

Answer 34

Poison pill

Question 35

Defense mechanism against unwanted takeovers when the target company sells off its major assets

Answer 35

Crown Jewels

Question 36

An attempt to gain control of a firm by soliciting a sufficient amount of votes to replace the existing management

Answer 36

Proxy solicitations

Question 37

The most common type of investment company which holds large investment portfolio of assets that is divided up into small “shares” and sold to investors

Answer 37

Mutual fund

Question 38

When investing parties use information not readily available to the public when making trading decisions

Answer 38

Insider trading

Question 39

Includes commercial banks, investment banks, insurance companies, mutual funds, corporations, governments, and any other large pool of assets that invest in financial markets

Answer 39

Institutional investors

Question 40

Active involvement of shareholders in corporate governance through influencing management decisions

Answer 40

Shareholder activism