Corporate Finance Terms by Category

 

Corporate Finance Terms by Category

Corporate Finance Terms by Category

Note: This table provides a basic overview of key terms in corporate finance. 

CategoryTermDefinition
Capital BudgetingNPVNet Present Value: The difference between the present value of cash inflows and the present value of cash outflows.
IRRInternal Rate of Return: The discount rate that makes the NPV of a project equal to zero.
Payback PeriodThe length of time required to recover the initial investment in a project.
Profitability IndexThe ratio of the present value of future cash flows to the initial investment.
Capital StructureDebtA company's obligations to pay back creditors.
EquityOwnership stake in a company.
WACCWeighted Average Cost of Capital: The average cost of a company's financing.
Capital Asset Pricing Model (CAPM)A model used to determine the expected return on an investment.
Working Capital ManagementInventory ManagementThe process of managing inventory levels.
Accounts Receivable ManagementThe process of managing customer payments.
Accounts Payable ManagementThe process of managing payments to suppliers.
Cash Conversion CycleThe time it takes to convert inventory into cash.
ValuationDiscounted Cash Flow (DCF)A valuation method that estimates the intrinsic value of an investment by calculating the present value of its future cash flows.
Comparable Company AnalysisA valuation method that compares a company's valuation multiples to those of similar companies.
Precedent TransactionsA valuation method that analyzes the prices paid for similar companies in recent acquisitions.
Risk ManagementHedgingInvesting in financial instruments to offset potential losses from fluctuations in asset prices.
DerivativesFinancial contracts whose value is derived from an underlying asset.
DiversificationInvesting in a variety of assets to reduce risk.

Capital Budgeting

TermDefinition
Capital BudgetingThe process of evaluating and selecting long-term investments
Net Present Value (NPV)The difference between the present value of cash inflows and the present value of cash outflows
Internal Rate of Return (IRR)The discount rate that makes the NPV of a project equal to zero
Payback PeriodThe length of time required to recover the initial investment in a project
Profitability IndexThe ratio of the present value of future cash flows to the initial investment
Discounted Cash Flow (DCF) AnalysisA valuation method that estimates the intrinsic value of an investment by calculating the present value of its future cash flows

Capital Budgeting (Continued)

TermDefinition
Discounted Payback PeriodThe length of time required to recover the initial investment in a project, considering the time value of money
Modified Internal Rate of Return (MIRR)An adjusted version of IRR that addresses some of IRR's shortcomings
Profitability Index (PI)The ratio of the present value of future cash flows to the initial investment
Sensitivity AnalysisA technique used to assess how changes in input variables affect project outcomes
Scenario AnalysisA technique used to evaluate project performance under different economic conditions
Capital RationingThe situation where a company has limited funds to invest in available projects

Capital Structure

TermDefinition
Capital StructureThe mix of debt and equity financing a company uses
DebtObligations to repay creditors, including bonds, loans, and other borrowings
EquityOwnership stake in a company, including common and preferred stock
Weighted Average Cost of Capital (WACC)The average cost of a company's financing, considering the proportion of debt and equity
LeverageThe use of debt to amplify returns on equity
Financial DistressThe condition where a company has difficulty meeting its debt obligations
Capital Structure TheoryTheories explaining how a company should choose its optimal debt-to-equity ratio

Working Capital Management

TermDefinition
Working CapitalCurrent assets minus current liabilities
Net Working CapitalCurrent assets minus current liabilities
Operating CycleThe time it takes to convert inventory into cash
Cash Conversion CycleThe time it takes to convert inventory into cash, less the time it takes to pay suppliers
Inventory ManagementThe process of managing inventory levels to balance costs and customer needs
Accounts Receivable ManagementThe process of managing customer payments to minimize bad debts and optimize cash flow
Accounts Payable ManagementThe process of managing payments to suppliers to optimize cash flow and maintain good supplier relationships

Valuation

TermDefinition
ValuationThe process of determining the fair market value of a company or asset
Discounted Cash Flow (DCF) AnalysisA valuation method that estimates the intrinsic value of an investment by calculating the present value of its future cash flows
Comparable Company Analysis (CCA)A valuation method that compares a company's valuation multiples to those of similar companies
Precedent TransactionsA valuation method that analyzes the prices paid for similar companies in recent acquisitions
Enterprise Value (EV)The total value of a company, including both debt and equity
Equity ValueThe value of a company's equity
Valuation MultiplesRatios used in comparable company analysis, such as price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA)

Risk Management

TermDefinition
Risk ManagementThe process of identifying, assessing, and controlling risks
Risk IdentificationThe process of identifying potential risks that could impact a company
Risk AssessmentThe process of evaluating the likelihood and potential impact of identified risks
Risk MitigationThe process of developing strategies to reduce the impact or probability of risks
Risk TransferShifting the risk to a third party, such as through insurance
Risk AvoidanceEliminating or avoiding activities that pose a risk
Risk AcceptanceAccepting the risk and allocating resources to deal with its consequences

Financial Ratios

CategoryRatioDefinition
LiquidityCurrent RatioMeasures a company's ability to meet short-term obligations
Quick RatioMeasures a company's ability to meet short-term obligations without relying on inventory
SolvencyDebt-to-Equity RatioMeasures the proportion of debt to equity in a company's capital structure
Interest Coverage RatioMeasures a company's ability to meet interest payments on its debt
ProfitabilityGross Profit MarginMeasures the profitability of a company's core operations
Net Profit MarginMeasures the proportion of net income to total revenue
Return on Equity (ROE)Measures the profitability of a company in relation to shareholders' equity
EfficiencyInventory Turnover RatioMeasures how efficiently a company manages its inventory
Accounts Receivable Turnover RatioMeasures how efficiently a company collects its receivables
Asset Turnover RatioMeasures how efficiently a company uses its assets to generate revenue

Dividend Policy

TermDefinition
Dividend PolicyThe decisions a company makes regarding dividend payments to shareholders
Dividend Payout RatioThe proportion of net income paid out as dividends
Dividend YieldThe annual dividend per share divided by the stock price
Dividend Growth RateThe rate at which dividends are expected to increase over time
Stock DividendA dividend paid in additional shares of stock rather than cash
Stock SplitAn increase in the number of shares outstanding without changing the total equity value
Share RepurchaseA company's purchase of its own shares

Mergers and Acquisitions (M&A)

TermDefinition
Mergers and Acquisitions (M&A)The combination of two or more companies
MergerThe combination of two companies into a new legal entity
AcquisitionThe purchase of one company by another, where the acquiring company retains its identity
SynergyThe increase in value created by combining two companies
Due DiligenceThe investigation of a target company before an acquisition
Hostile TakeoverAn acquisition attempt against the wishes of the target company's management
Leveraged Buyout (LBO)An acquisition financed primarily with debt

Financial Markets

TermDefinition
Financial MarketsPlatforms where financial assets (stocks, bonds, derivatives, currencies) are created, traded, and priced
Primary MarketWhere securities are issued for the first time (IPO, bond issuance)
Secondary MarketWhere securities are traded after the initial issuance
Stock MarketA market where shares of publicly traded companies are bought and sold
Bond MarketA market where debt securities (bonds) are issued and traded
Money MarketA market for short-term debt instruments (less than a year)
Capital MarketA market for long-term debt instruments and equity securities
Foreign Exchange Market (Forex)A market where currencies are traded
Derivatives MarketA market for financial instruments whose value is derived from an underlying asset (options, futures)

Financial Statement Analysis

TermDefinition
Financial StatementsFormal records of a company's financial activities
Income StatementShows a company's revenues, expenses, and net income over a period
Balance SheetShows a company's assets, liabilities, and equity at a specific point in time
Cash Flow StatementShows the inflows and outflows of cash during a period
Ratio AnalysisThe process of evaluating a company's financial performance by comparing its ratios to industry averages or historical data
Horizontal AnalysisComparing financial data over multiple periods
Vertical AnalysisAnalyzing financial data as a percentage of a base figure (e.g., revenue or total assets)