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Fundamentals of Finance
Chapters 11, 12, 19, 20
50
Finance
Undergraduate 4
10/19/2007

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Term
American Terms
Definition
the foreign exchange rate quotation that represents the number of American dollars that can be bought with one unit of local currency.
Term
Strategic Business Plan
Definition
A long run plan that outlines in broad terms the firms basic strategy for the next 5-10 years.
Term
Capital Budgeting
Definition
the process of planning expenditures on assets whose cash flows are expected to extend beyond one year.
Term
Net Present Value (NPV) Method
Definition
A method of ranking investment proposals using NPV, which is equal to the present value of future net cash flows, discounted at the cost of capitals.
Term
Mutually Exclusive Projects
Definition
A set of project where only one can be accepted.
Term
Independent Projects
Definition
Projects whose cash flows are not affected by the acceptance or nonacceptance of other projects.
Term
Internal Rate of Return (IRR)
Definition
The discount rate that forces a projects NPV to equal zero.
Term
Reinvestment Rate Assumption
Definition
The assumption that cash flows from a project can be reinvested.
Term
Multiple IRR's
Definition
the situation where a project has two or more IRR's
Term
Payback Period
Definition
The length of time required for an investment's net revenues to cover its cost.
Term
Post Audit
Definition
A comparision of actual versus expectd results for a given capital project.
Term
Incremental Cash Flow
Definition
A cash flow that will occur if and only if the firm takes on a project.
Term
Replacement Analysis
Definition
the situation where old and less efficient equipment is replaced by newer and more efficient equipment.
Term
Sunk Cost
Definition
A cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected.
Term
Opportunity Cost
Definition
The return on the best alternative use of an asset, or the highest return that will not be earned if funds are invested in a particular project.
Term
Stand Alone Risk
Definition
The risk an asset would have if it were a firm's only asset and if investors owned only one stock. It is measured by the variablity of the assets expected return.
Term
Scenario Analysis
Definition
A risk analysis technique in which "bad" and "good" sets of financial circumstances are compared with a most likely or base-case situation.
Term
Base Case Scenario
Definition
An analysis in which all of the input variables are set at their most likely values.
Term
Worst-Case Scenario
Definition
Ana analysis in which all of the input variables are set at their worst reasonably forecasted values.
Term
Best Case Scenario
Definition
An analysis in which all of the input variable are set at their best reasonably forecasted values.
Term
Risk-Adjusted Discount Rate
Definition
The discount rate that applies to a particular risky cash flow stream; the riskier the project's cash flow stream, the higher the discount rate.
Term
Multinational or Global Corporation
Definition
A firm that operateds in an integrated fashion in a number of countries.
Term
7 reasons why companies go global
Definition
1. to seek production efficiency 2. to avoid political trade and regulatory hurdles 3. to broaden their markets 4. to seek raw materials and new technologies 5. to protect the secrecy of their processes and products 6. to diversify 7. to retain customers
Term
International Monetary System
Definition
The framework within which exchange rtes are determined. It is the blueprint for interantional trade and capital flows
Term
Exchange Rate
Definition
The number of units of a given currency that can be purchased for one unit of another currency
Term
Freely-Floating regime
Definition
Occurs when the exchange rate is determined by supply and demand for the currency.
Term
Managed Float Regime
Definition
occurs when there is sisgnificant government intervention to control the exchange rte via manipulation of the currency's supply and demand
Term
Cross Rate
Definition
the exchange rate between any two currencies.
Term
Indirect Quotation
Definition
The foreign currency of one unit of the home currency.
Term
Direct Quotation
Definition
The home currency price of one unit of the foreign currency.
Term
European Terms
Definition
The foreign exchange rate quotation that represents the units of local currency that can be bought with one US $ "European" is intended as a generic term that applies globally
Term
Interest Rate Parity
Definition
Specifies that investors should expect to earn the same return in all countries after adjusting for risk
Term
Spot Rate
Definition
The effective exchange rate of a foreign currency for delivery on (approximately) the current day
Term
Forward Exchange Rate
Definition
An agreed-upon price at which two currencies will be exchanged at some future date.
Term
Eurocredits
Definition
Floating0-rate bank loans, available in most major trading currencies, that are tied to LIBOR
Term
Eurodollar
Definition
A US dollar deposited in a bank outside the US
Term
Exchange Rate Risk
Definition
The risk that relates to what the basic cash flows will be worth in the parent company's home currency
Term
Political Risk
Definition
Potential actions by a host government that would reduce the value of a companys investment
Term
Business Climate
Definition
Refers to a country's social, political and economic environment
Term
Arrearages
Definition
Unpaid preferred dividends
Term
Adjustable Rate Preferred Stocks (ARPS)
Definition
Preferred stocks whose dividends are tied to the rate of treasur securities
Term
Sale and Leaseback
Definition
An arrangement whereby a firm sells land, buildings, or equipment and simutaneously leases the property back for a specified period under specific terms
Term
Lessee
Definition
the party that uses, rather than the one who owns, the leased property
Term
Lessor
Definition
the owner of the leased property
Term
Operating Lease
Definition
A lease under which the lessor maintains and finances the property; also called a service lease
Term
Financial Lease
Definition
A lease that does not provide for maintenance services, is not cancelable
Term
Residual Value
Definition
The value of leased property at the end of the lease term
Term
Warrant
Definition
A long term option to buy, a stated number of shares of common stock at a specified price
Term
Conversion Price
Definition
The effective price paid for common stock obtained by converting a convertible security
Term
Conversion Ratio
Definition
the number of shares of common stock that are obtained by converting a convertible bond or share of convertible preferred stock
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