Financial Terminology

Question 1

Define the following financial term:

DCF

Answer 1

Discounted Cash Flow: A method of valuing a project, company, or asset using the concepts of the time value of money.

Question 1

Define the following financial term:

ROI

Answer 1

Return on Investment: A performance measure used to evaluate the efficiency of an investment. ROI is calculated by dividing benefit (return) by cost.

Question 2

Define the following financial term:

CFROI

Answer 2

Cash Flow Return on Investment: A valuation model that assumes the stock market sets prices based on cash flow, not on corporate performance and earnings. CFROI is calculated by dividing cash flow by market recapitalization.

Question 3

Define the following financial term:

CAGR

Answer 3

Compound Annual Growth Rate: The year-over-year growth rate of an investment over a specified period of time. It is an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate.

Question 4

Define the following financial term:

NPV

Answer 4

Net Present Value: The sum of the present values (PVs) of a time series of cash flows, both incoming and outgoing. It compares the present value of money today to the present value of money in the future, taking inflation and returns into account.

Question 5

Define the following financial term:

LBO

Answer 5

Leveraged Buyout: An acquisition (usually of a company) where the purchase price is financed through a combination of equity and debt and in which the cash flows or assests of the target are used to secure and repay the debt.

Question 6

Define the following financial term:

Private Equity

Answer 6

An asset class consisting of equity securities in operating companies that are not publicily traded on a stock exchange.

Question 7

Define the following financial term:

Hedge Funds

Answer 7

An investment fund that can undertake a wider range of investment and trading activities than other funds, but which is only open for investment from particular types of investors specified by regulators. Hedge funds most commonly trade liquid securities on public markets. They employ a wide variety of investment strategies and make use of techniques such as short selling and leverage.

Question 8

Define the following financial term:

Derivative

Answer 8

A contract between two parties that specifies conditions (especially the dates, resulting values of the underlying variables, and notional amounts) under which payments are to be made between the parties. Most developed countries give special legal exemptions that make derivatives an attractie legal form to extend credit. However, because of their complexity and lack of transparency derivatives can cause capital markets to underprice credit risk. The use of derivations to mask credit risk from third parties contributed to the financial crisis of 2008 in the United States.

Question 9

Define the following financial term:

Venture Capital

Answer 9

Financial capital provided to early-stage, high-potential, high risk, growth startup companies, with the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital.

Question 10

Define the following financial term:

Fixed Income (Bonds)

Answer 10

Any type of investment that is not equity, which obligates the borrower/issuer to make payments of a fixed schedule, even if the number of the payments may be variable.

Question 11

Define the following financial term:

Equity (Stock)

Answer 11

The residual claim or interest of the most junior class of investors in assests, after all liabilites are paid. An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends and capital gains, as the value of the stock rises.

Question 12

Define the following financial term:

Discount Rate

Answer 12

An interet rate a central bank charges depository institutions that borrow reserves from it. The Federal Reserve’s discount window is an example of a discount rate.

Question 13

Define the following financial term:

WACC

Answer 13

Weighted Average Cost of Capital: A calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. All captial sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation.

Question 14

Define the following financial term:

Depreciation

Answer 14

Depreciation refers to 1) the decrease in value of assests, and 2) the allocation of the cost of assets to periods in which the assets are used.

Question 15

Define the following financial term:

Amortization

Answer 15

The allocation of a lump sum amount to different time periods, particularly for loans and other forms of finance, including related interest of other finance charges.

Question 16

Define the following financial term:

Acid Test / Quick Ratio

Answer 16

Measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately. A company with a Quick Ration of less than 1 cannot currently pay back its current liabilities.

Question 17

Define the following financial term:

Assets

Answer 17

Assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Assests represent value of ownership that can be converted into (or already is) cash.

Question 18

Define the following financial term:

Asset Turnover

Answer 18

The amount of sales generated for every dollar’s worth of assets. It is calculated by dividing sales in dollars by assets in dollars.

Question 19

Define the following financial term:

Balance Sheet

Answer 19

A summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organization, such as an LLC or an LLP. Assets, liabilities, and ownership equity are listed as of a specific date, such as the end of its financial year.

Question 20

Define the following financial term:

Budget

Answer 20

An estimation of the revenue and expenses over a specified future period of time. A surplus budget means profits are anticipated, a balanced budget means that revenues are expected to equal expenses, and a deficit budget means expenses will exceed revenues.

Question 21

Define the following financial term:

Capital Employed

Answer 21

Total assets less current liabilities, or fized assets plus working capital. It is the value of the assets that contriubute to a company’s ability to generate revenues, i.e. their liquidity.

Question 22

Define the following financial term:

Cashflow

Answer 22

The movement of money into or out of a business, project, or financial product. Measurement of cashflow can be used for calculating other parameters that give information on a company’s value and situation.

Question 23

Define the following financial term:

Cashflow Statement

Answer 23

A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. The statement captures both the current operating results and the accompanying changes in the balance sheet.

Question 24

Define the following financial term:

Cost of Debt Ratio

Answer 24

The interest expense over a given period as a percentage of the average outstanding debt over the same period. For example: cost of interest divided by average outstanding debt.

Question 25

Define the following financial term:

COGS

Answer 25

Cost of Goods Sold: The inventory costs of those good a business has sold during a particular period. Costs include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Question 26

Define the following financial term:

Current Assets

Answer 26

A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.

Question 27

Define the following financial term:

Current Ratio

Answer 27

A liquidity ratio that measures a company’s ability to pay short-term obligations. It is caluculated by dividing Current Assets by Current Liabilities.

Question 28

Define the following financial term:

Current Liabilities

Answer 28

All liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer. They are obligations that will be settled by current assets or by the creation of new current liabilities.

Question 29

Define the following financial term:

Dividend

Answer 29

Payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.

Question 30

Define the following financial term:

EBIT

Answer 30

Earnings Before Interest and Taxes: A measure of a firm’s profit that excludes interest and income tax expenses.

Question 31

Define the following financial term:

EBITDA

Answer 31

Earnings Before Interest, Taxes, Depreciation, and Amortization: A non-GAAP metric that is measured exactly as stated. All interest payments, tax, depreciation and amortization entries in the income statement are reversed out from the bottom-line net income.

Question 32

Define the following financial term:

Fixed Assets

Answer 32

Assets and property which cannot easily be converted into cash. This can be compared with Current Assets such as cash or bank accounts, which are described as liquid assets.

Question 33

Define the following financial term:

Fixed Costs

Answer 33

Business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs. This is in contrast to variable costs, which are volume-related (and are paid per quantity produced).

Question 34

Define the following financial term:

Goodwill

Answer 34

An account that can be found int heassets portion of a company’s balance sheet. Goodwill can often arise when one company is purchased by another company. In an acquisition, the amount paid for company over book value usually accounts for the target firm’s intangible assets, such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology.

Question 35

Define the following financial term:

Gross profit

Answer 35

The difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments. This is different from Operating Profit (earnings before interest and taxes).

Question 36

Define the following financial term:

IPO

Answer 36

Initial Public Offering: Where shares of stock in a company are sold to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company.

Question 37

Define the following financial term:

Liabilities

Answer 37

An obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

Question 38

Define the following financial term:

Reserve Requirement

Answer 38

A bank regulation that sets the minimum reserves each bank must hold.

Question 39

Define the following financial term:

Net Current Assets

Answer 39

The amount of money a company has on hand, or will have, in a given year. Net Current Assets are calculated by subtracting Current Liabilities from Current Assets.

Question 40

Define the following financial term:

Net Assets

Answer 40

The owners’ equity in a company Balance Sheet. It is equal to assets minus liabilities.

Question 41

Define the following financial term:

Net Profit

Answer 41

A measure of the profitiability of a venture after accounting for all costs. It is equal to the gross profit minus overheads minus interest payable for a given time period.

Question 42

Define the following financial term:

P/E Ratio

Answer 42

Price-Earnings Ration: A valuation ratio of a company’s current share price compared to its per-share earnings. In general, a high P/E suggests that investors are expecting higher earnings gorwth in the future compared to companies with a lower P/E.

Question 43

Define the following financial term:

P&L Statement

Answer 43

Profit & Loss Statement: A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year.

Question 44

Define the following financial term:

Overhead

Answer 44

An ongoing expense of operating a business, usually used to group expenses that are necessary to the continued functionoing of the business but cannot be immediately associated with the products/services being offered.

Question 45

Define the following financial term:

ROCE

Answer 45

Return on Capital Employed: Compares earnings with capital invested in the company. It is similar to Return on Assets (ROA), but takes into account sources of financing.

Question 46

Define the following financial term:

Share Capital

Answer 46

The portion of a company’s equity that has been obtained (or will be obtained) by trading stock to a shareholder for cash or an equivalent item of capital value. For example, a company can issue shares in exchange for computer servers, instead of purchasing the serves with cash.

Question 47

Define the following financial term:

Working capital

Answer 47

A financial metric which represents operating liquidity available to a business, organiziation or other entity. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.