Final for Finance

Payout policy Decisions that a firm makes regarding whether to distribute cash to shareholders, how much cash to distribute, and the means by which cash should be distributed.
Date of Record (Dividends) Set by the firm’s directors, the date on which all persons whose names are recorded as stockholders receive a declared dividend at a specified future time.
Ex-Dividend A period beginning 2 business days prior to the date of record, during which a stock is sold without the rights to receive the current dividend.
Payment Date Set by the firm’s directors, the actual date on which the firm mails the dividend payment to the holders of the record.
Open-market share repurchase A share repurchase program in which firms simply buy back some of their outstanding shares on the open market.
Tender offer repurchase A repurchase program in which a firm offers to repurchase a fixed number of shares, usually at a premium relative to the market value, and shareholders decide whether or not they want to sell back their shares at that price.
Dutch Auction repurchase A repurchase method in which the firm specifies how many shares it wants to buy back and a range of prices at which it is willing to repurchase shares. Investors specify how many shares they will sell at each price in the range, and the firm determines the minimum rice required to repurchase its target number of shares. All investors who tender receive the same price.
Dividend Reinvestment plans (DRIPs) Plans that enable stockholders to use dividends receive on the firm’s stock to acquire additional shares- even fractional shares- at little or no transaction cost.
Residual theory of dividends A school of thought that suggests that the dividend paid by a firm should be viewed as a residual- the amount left over after all acceptable investment opportunities have been undertaken.
Dividend Irrelevance theory Miller and Modigliani’s theory that in a perfect world, the firms value is determined solely by the earning power and risk of its assets (investments) and that the manner in which it splits its earnings stream between dividends and internally retained (and reinvested) funds does not affect this value.
Clientele Effect The argument that different payout policies attract different types of investors but still do not change the value of the firm.Dividend relevance theory- The theory, advanced by Gordon and Linter, that there is a direct relationship between a firm’s dividend policy and its market value.
Bird-in-the-hand Argument The belief, in support of the dividend relevance theory, that investors see current dividends as less risky than future dividends or capital gains.
Informational Content The information provided by the dividends of a firm with respect to future earnings, which causes owners to bid up or down the price of the firm’s stock.
Dividend Policy The firm’s plan of action to be followed whenever it makes a dividend decision.
Excess Earnings Accumulation Tax The tax the IRS levies on retained earnings above $250,000 for most businesses when it determines that the firm has accumulated on excess of earnings to allow owners to delay paying ordinary income taxes on dividends received.
Catering Theory A theory that says firms cater to the preferences of investors, initiating or increasing dividend payments during periods in which high-dividend stocks are particularly appealing to investors.
Dividend Payout Ratio Indicates the percentage of each dollar earned that a firm distributes to the owners in the form of cash. It is calculated by dividing per share by its earnings share.
Stock dividend The payment, to existing owners, of a dividend in the form of stock.
Small(ordinary) Stock dividend A stock dividend representing less than 20% to 25% of the common stock outstanding when the dividend to declared.
Stock Split A method commonly used to lower the market price of a firms stock by increasing the number of shares belonging to each shareholder.
Reverse Stock Split A method used to raise the market price of a firm’s stock by exchanging a certain number of outstanding shares for one new hare.
Working Capital (or short term financial) management Management of current assets and current liabilities.
Working Capital- Current assets, which represent the portion of investment that circulates from one form to another in the ordinary conduct of business.Net Working Capital- The difference between the firm’s current assets and its current liabilities. Profitability- The relationship between revenues and costs generated by using the firms assets- both current and fixed- in productive activities.Risk (of Insolvency)- The probability that a firm will be unable to pay its bills as they come due.
insolvent- Describes a firm that is unable to pay its bills as they come due. Cash Conversion Cycle (CCC)- the length of time required fro a company to convert cash invested in its operation to cash received as a result of its operations.Operating Cycle (OC)- The time from the beginning of the production process to collection of cash to collection of cash from the sale of the finished product.
Permanent Funding requirement- A constant investment in operating assets resulting from constant sales over time.Seasonal Funding requirement- An investment in operating assets that varies over time as a result of cyclic sales. Aggressive funding strategy- funding strategy under which the firm funds its seasonal requirements with short term debt and its permanent requirements with long-term debt.Conservative funding strategy- a funding strategy under which the firm funds both its seasonal and its permanent requirments with long-term debt.
ABC inventory system- Inventory management technique that divides inventory into three groups A,B,C in descending order of importance and level of monitoring on the basis of the dollar investment in each.
Two-Bin method Unsophisticated inventory monitoring technique that is typically applied to C group items and involves reordering inventory when one of two bins is empty.
Economic order quantity (EOQ) model inventory management technique for determining team’s optimal order size, which is the size that minimizes the total of its order cost and carrying costs.
Order Costs- the fixed clerical costs of placing and receiving an inventory order.Carrying costs- the variable costs per unit of holding an item in inventory for a specific period of time. Total cost of inventory- the sum of order costs and carrying cost of inventory.
Reorder point- the point at which to reorder inventory, expressed as days of lead-time x daily usage.Safety Stock- extra inventor that is held to prevent stock outs of important items.
Just-in-time (JIT) system Materials Requirement planning (MRP) system Just-in-time (JIT) system- Inventory management technique that minimizes inventory investment by having materials arrives at exactly the time they are needed for production.Materials Requirement planning (MRP) system- inventory management techniques that applies EOQ concepts and a computer to compare production needs to available inventory balances and determine when orders should be placed for various items on a products bill of materials.
Materials Requirement planning (MRP) systemManufacturing resource planning II (MRP II) system Materials Requirement planning (MRP) system- inventory management techniques that applies EOQ concepts and a computer to compare production needs to available inventory balances and determine when orders should be placed for various items on a products bill of materials.Manufacturing resource planning II (MRP II) system- A sophisticated computerized system that integrates data from numerous areas such as finance, accounting, marketing, engineering, and manufacturing and generates production plans as well as numerous financial and management reports.
Enterprise resource planning (ERP) A computerized system that electronically integrates external information about the firm’s supplies and customers with the firm’s departmental data so that information on all available resources- human and material- can be instantly obtained in a fashion that eliminates production delays and controls cost.
Credit standards- the firm’s minimum requirements for extending credit to a customer. What are the 5 C’s of credit? the five key dimensions- character, capacity, capital, collateral, and conditions- used by credit analyst to provide a framework for in-depth credit analysis.
Credit Terms- the terms of sale for customers who have been extended credit by the firm.Cash discount- a percentage deduction from the purchase price, available to he credit customer who pays its account within a specified time. Cash Discount Period- the number of days after the beginning of the credit period during which the cash discount is available.Credit Period- the number of days after the beginning of the credit period until full payment of the account is due.
Credit monitoring the ongoing review of a firm’s accounts receivable to determine whether customers are paying according to the stated credit terms.
Aging schedule A credit monitoring technique that breaks down accounts receivable into groups on the basis of their time of origin, it indicates the percentages of total accounts receivable balance that have been outstanding for a specified period of time.
Float- funds that have been sent by the payer but are not yet usable funds to the payee.What is Mail float, processing float, and clearing float? Mail float- the time delay between when payment is placed in the mail and when it is received.Processing float- the time between receipt of a payment and its deposit into the firms account.Clearing Float- the time between deposit of a payment and when spendable funds become available to the firm.
Lockbox system a collection procedure in which customers mail payments to a post office box that is emptied irregularly by the firm’s bank, which processes the payments and deposits them in the firm’s account. This system speeds up collection time by reducing processing time as well as mail and clearing time.
Cash concentration- the processes used by the firm to bring lockbox and other deposits together into one bank, often called the concretion bank. Controlled disbursing- the strategic use of mailing points and bank accounts to lengthen mail float and clearing float, respectively.
Depository transfer check (DTC)- an unsigned check drawn on one of a firm’s bank accounts and deposited in another.
ACH (Automated clearinghouse) transfer preauthorized electronic withdrawal from the payer’s account and deposits into the payee’s account via a settlement among banks by the automated clearhouse, or ACH.
Wire Transfer-Zero-balance account (ZBA) Wire Transfer- An electronic communication that, via bookkeeping entries, removes funds from the payer’s bank and deposits them in the payee’s bank.Zero-balance account (ZBA)- a disbursement account that always has an end-of-day balance of zero because the firm deposits only to cover checks drawn on the account only as they are presented for payment each day
Spontaneous liabilities- Unsecured short-term financing- Spontaneous liabilities- financing that arise from the normal course of business, the two major short-term sources of such liabilities are accounts payable and accrual.Unsecured short-term financing- short-term financing obtained without pledging specific assets as collateral.
Accounts payable management- Cost of giving up a cash discount-Stretching accounts payable- Accounts payable management- management by the firm of the time that elapses between its purchase of raw materials and its mailing payments to the supplier.Cost of giving up a cash discount- the implied rate of interest paid to delay payment of an account payable for an additional number of days.Stretching accounts payable- paying bills as late as possible without damaging the firms credit rating.
Accruals- liabilities for services received for which payment has yet to be made.
Short term-term, self-liquidating loan an unsecured short term loan in which the use to which the borrowed money is put provides the mechanism through which the loan is repaid.
Prime rate of interest (prime rate) The lowest rate of interest charged by leading banks on business loans to there most important business borrowers.
Fixed rate loan- a loan with a rate of interest that is determined at a set increment above the prime and remains unvarying until maturity.Floating -rate loan- a loan with a rate of interest initially set at an increment above the prime rate and remains unvarying until maturity. Discount loan- Loan on which interest is paid in advance by being deducted form the amount borrowed.Single-payment note- a short term, one time, loan made to a borrower who needs funds for a specific purposed for a short period.
Line of credit an agreement between a commercial bank and a business specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time.
Operating-change restrictions- contractual restrictions that a bank may impose on a firm’s financial condition or operations as part of a line-of-credit agreement.
Compensending Balance- A required checking account balance equal to a certain percentage of the amount borrowed from a bank under a line-of-credit or revolving credit agreement.
Annual cleanup the requirement that for a certain number of days during the year borrowers under a line of credit carry a zero loan balance (that is, owe the bank nothing).
Revolving credit agreement- a line of credit guaranteed to a borrower by a commercial bank regardless of the scarcity of money.
Commitment fee- the fee that is normally charge on a revolving credit agreement, it often applies to the average unused portion of the borrowers credit line.
Commercial paper a form of financing consisting of short-term, unsecured, promissory notes issued by firms with a high credit standing.
Letter of credit- a letter written by a company’s bank to the company’s foreign supplier, stating that the bank guarantees payment of an invoiced amount if all the underlying agreements are met. Secured short-term financing- short term financing (loan) that has specific assets pledged as collateral.Security agreement- the agreement between the borrower and the lender that specifies the collateral held against a secured loan.
Percentage advance the percentage of the book value of the collateral that constitutes the principle of a secured loan.
Commercial finance companies lending institutions that make only secured loans- both short term and long term to business.
Pledge of accounts receivable- the use of a firm’s accounts receivable as security or collateral to obtain a short-term loan. Lien- a publicly disclosed legal claim on loan collateral.
Non-noification basis- – the basis on which a borrower, having pledged an account receivable, continues to collect the account payments without notifying the account customer.
Notification basis- the basis on which an account customer whose account has been ledged (or factored) is notified to remit payment directly to the lender (or factor).
Factoring accounts receivable- the outright sale of accounts receivable at a discount to a factor or other financial institution.
Factor a financial institution that specializes in purchasing accounts receivable from business.
Nonrecourse basis – the basis on which accounts receivable are sold to a factor with the understanding that the factor accepts all credit risks on the purchased accounts.
Floating inventory lien- a secured short-term loan against inventory under which the lender’s claim is on the borrows, inventory in general.
Trust receipt inventory loanWarehouse receipt loan Trust receipt inventory loan- a secured short-term loan against inventory under which the lender advances 80 to 100 percent of the cost of the borrowers relatively expensive inventory items in exchange for the borrowers promise to repay the lender, with accrued interest, immediately after the sale of each item of collateral.Warehouse receipt loan- a secured short term loan against inventory under which the lender receives control of the pledged inventory collateral, which is stored by a designated warehousing company on the lender’s behalf.

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