Test 4 Terms Flashcards
Chapter 11
Definition
Additivity Problem
A possible problem when using IRR to choose combination of projects in a capital-constrained environment.
Capital-Constrained
When a firm does not have enough money to invest in all of its positive NPV projects.
Cash Flow Problem
A possible problem when using IRR to choose combination of projects in a capital-constrained environment.
Frequency Function
A financial calculator function for multiple cash flows.
Initial Outlay
The total dollar amount to begin a project.
IRR
A capital budgeting method that includes the time value of money, all of the cash flows, and has an objective decision rule.
IRR Decision Rule
If the computed IRR is greater than the hurdle rate, accept.
NPV
A capital budgeting method that includes the time value of money, all of the cash flows, and has an objective decision rule.
NPV Decision Rule
If the computed NPV is greater than zero, accept.
Payback
A capital budgeting method that does not include time value of money, all of the cash flows, or an objective decision rule.
Payback Decision Rule
If the computed payback is less than managements cutoff, accept.
Terminal Value
The final dollar amount from a project.
Chapter 13
Definition
Comparable Multiples
A technique to value an entire firm based on financial ratios of other firms or industries.
Control Premium
Increasing the value of a firm if the purchaser is getting a controlling interest.
DCF Firm Valuation
A technique to value an entire firm based on first estimating all future cash flows and second discounting them back to the present value.
Earnings Yield
The inverse of the PE ratio.
EBITDA Multiple
A comparable multiples approach for valuing entrepreneurial firms.
Fair Value of a Firm
Another name for the intrinsic value of a firm.
Going Concern Value
How much a firm is worth as an operating business.
House Appraisal
A document that values a house based upon replacement cost and comparable multiples.
Intrinsic Value of a Firm
The value of a firm when computed with an economic model.
Liquidation Value
How much a firm is worth if all of its assets were sold off to cover its debts with the residual going to shareholders.
Liquidity Discount
Reducing the value of a firm if it does not have liquid stock.
Market Value of a Firm
How much the firm sells for right now.
Replacement Cost Method
A technique to value an entire firm based upon estimating how much it would cost to rebuild the company from scratch.
Salary Adjustment
Making sure a fair salary is deducted from future cash flows when valuing a small business.
Chapter 14
Definition
2 and 20 Shops
Private equity firms that receive a 2% annual fee as well as 20% of all investment increases.
Angels
Wealthy individuals who invest in new ventures for the return, thrill, and to help entrepreneurs.
Articles of Organization
Legal document for the formation of an LLC.
Bootstrapping
Using inventive ways to limit expenses and to fund a new venture.
Business Entity Structure
The choice of legal structure to organize a firm such as LLC or S-corporation.
Capital Call
When venture capitalists call investors to receive installments of investments.
C-Corp
A legal entity that offers limited liability with double taxation.
Double Taxation
In a C-corporation when taxes are paid at the corporate and then the individual level.
Entrepreneurial Finance
Field of finance that deals specifically with small businesses and high-growth ventures.
Factoring
Selling the accounts receivable at a discount to receive immediate cash.
Financial Harvest
Noun for harvesting.
Give Birth to Company
When the article are filed and a checking account is opened in the name of the business.
Harvesting
Selling a venture either through IPO or M&A.
K-1
The IRS form that shows gains from a partnership or multi-member LLC.
Lifestyle Business
A small business that maximizes utility and not necessarily wealth.
Like-Kind
Income or losses from similar lines of business or investment that can offset each other for tax purposes.
Limited Liability
Legal protection for one’s personal assets from business law suits.
LLC
A legal entity that offers limited liability with single or double taxation.
LLC Member
An “owner” of an LLC.
Mingle Funds
Also comingle funds. Mixing personal and business assets resulting in destroying the limited liability protection.
New Venture
A new business that targets high-growth and a big harvest.
Partnership
A legal entity of two or more owners with unlimited liability and single taxation.
Phantom Income
Income that must be taxed in a year even if the income is not distributed from the company.
Pierce the Veil
When an attorney is able to destroy an owner’s limited liability protection such as when funds are mingled.
Private Equity
Professionally managed investment capital that typically buys entire firms at a time.
Schedule C
The self-employment IRS form.
S-Corp
A legal entity that offers limited liability with single taxation.
SEC
Securities and Exchange Commission of the US. Responsible for making sure enough information is publicly available for publicly traded firms.
Seed Financing
Investing in very young, start-up ventures.
Self Employment Taxes
Medicaid and social security taxes (FICA taxes) that must be paid for employees.
Sole Proprietorship
A legal entity of one owner with unlimited liability and single taxation.
Trade Credit
Accounts payable on the balance sheet. A way to bootstrap a start-up.
Unlimited Liability
No legal protection for one’s personal assets from business law suits.
Utility Function
Things that make a person happy.
Venture Capital
Professionally managed investment capital that typically invests in very young new ventures.
Wealth Function
Things that make a person wealthy.
