Chapter 5 Vocabulary

Question 1

A firm’s management of its short term assets and liabilities

Answer 1

Working capital management

Question 2

A firm’s uses of its long term assets to try and achieve optimal returns

Answer 2

Capital budgeting

Question 3

A firm’s mixture of debt versus equity in financing itself

Answer 3

Capital structure

Question 4

Any balance sheet item that can be converted to cash in under one year

Answer 4

Short term (current) asset

Question 5

Any balance sheet item that is payable in one year or less

Answer 5

Short term (current) liability

Question 6

A firm’s current assets - current liabilities

Answer 6

Net Working Capital

Question 7

Reason for holding cash in order to make planned payments for items

Answer 7

Transaction motive

Question 8

Reason for holding cash in order to protect the firm from unpredicted demands and payments

Answer 8

Safety motive

Question 9

Reason for holding cash in order to use those funds, or exploit an unexpected opportunity

Answer 9

Speculation motive

Question 10

Short term securities that are easily converted to cash

Answer 10

Marketable securities

Question 11

The time a company puts in material for production, to the time it collects a cash payment

Answer 11

Operating cycle

Question 12

The length of time from a firm’s cash payments for raw materials, to the time it collects cash on a sale

Answer 12

Cash conversion cycle

Question 13

Length of time that a company holds its sales in inventory

Answer 13

Days sales in inventory

Question 14

Length of time that it takes a company to collect cash from a sale

Answer 14

Average collection period

Question 15

Length of time it takes for a firm to pay its suppliers in cash

Answer 15

Days payable outstanding

Question 16

Costs associated with holding high amounts of inventory

Answer 16

Carrying costs

Question 17

Costs associated with current assets decrease, such as losing sales

Answer 17

Shortage costs

Question 18

The amount of cash or short term securities that a firm holds

Answer 18

Cash reserves

Question 19

A strategy where a firm fires to match the maturities of its assets and liabilities

Answer 19

Maturity hedging

Question 20

The discounted present value of a projects expected cash flow

Answer 20

Net present value

Question 21

The length of time a project takes to generate enough cash to pay back its initial costs

Answer 21

Payback rule

Question 22

The weighted average cost of debt and equity financing. It represents the cost of obtaining financing for the company’s investments

Answer 22

Cost of capital

Question 23

The length of time a project takes to pay itself back, using discounted cash flows

Answer 23

Discounted payback rule

Question 24

An investments projected net income divided by its projected average book value

Answer 24

Average accounting return

Question 25

The rate of return needed to make a project break even

Answer 25

Internal rate of return

Question 26

Shares that represent an ownership stake in a company

Answer 26

Common stock

Question 27

Debt that matures in more than one year

Answer 27

Long term debt

Question 28

Generally invest in short-term debt securities, such as bankers acceptances, commercial paper, negotiable certificates of deposit and treasury bills with a maturity of one year or less and often 30 days or less

Answer 28

Money markets

Question 29

The market where new securities offered

Answer 29

Primary market

Question 30

The most common type of markets where negotiable securities are bought and sold

Answer 30

Secondary market

Question 31

Term describing how shareholders can lose only their original investment in the event that the firm fails

Answer 31

Limited liability

Question 32

The claim that shareholders have on a firm’s assets after all creditors have been paid

Answer 32

Residual claim

Question 33

A form of stock ownership that promises a periodic dividend payment

Answer 33

Preferred stock

Question 34

A long term borrowing obligation

Answer 34

Bond

Question 35

The amount of money that a bond issuer promises to pay upon maturity

Answer 35

Par Value (face value)

Question 36

A promised periodic interest payment paid over the life of the bond

Answer 36

Coupon payment

Question 37

An issuers right to pay off the bond ahead of time at an agreed upon price

Answer 37

Call provision

Question 38

A bond giving the bond holder the right to convert the bond into common stock

Answer 38

Convertible bond

Question 39

An investment grade bond that has been downgraded to a poor quality bond

Answer 39

Fallen angel

Question 40

A riskier bond that is considered non investment grade by a major rating agency. These companies must pay higher interest rates to their bond holders

Answer 40

Junk bond (High yield bond)

Question 41

The balance of the costs and disadvantages of debt financing

Answer 41

Static tradeoff theory

Question 42

The ratio of a firm’s debt outstanding

Answer 42

Financial leverage

Question 43

Cash payments made to equity investors

Answer 43

Dividends

Question 44

The decision by a company on what percentage of earnings should be paid to investors in the form of dividends

Answer 44

Dividend policy

Question 45

The annual dividend divided by the stock price

Answer 45

Dividend yield

Question 46

Annual dividends divided by annual earnings

Answer 46

Dividend payout ratio