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costs of financial distress

Costs arising from bankruptcy or distorted business decisions before bankruptcy.

coupon: The interest payments paid to the bondholder.

coupon rate: Annual interest payment as a percentage of face value.

credit analysis: Procedure to determine the likelihood a customer will pay its bills.

credit policy: Standards set to determine the amount and nature of credit to extend to customers.

cumulative voting: Voting system in which all the votes one shareholder is allowed to cast can be cast for one candidate for the board of directors.

current yield: Annual coupon payments divided by bond price.

decision tree: Diagram of sequential decisions and possible outcomes.

default premium: Difference in promised yields between a default-free bond and a riskier bond.

degree of operating leverage (DOL): Percentage change in profits given a 1 percent change in sales.

depreciation tax shield: Reduction in taxes attributable to the depreciation allowance.

discount factor: Present value of a $1 future payment.

discount rate: Interest rate used to compute present values of future cash flows.

diversification: Strategy designed to reduce risk by spreading the portfolio across many investments.

dividend: Periodic cash distribution from the firm to its shareholders.

dividend discount model: Computation of today`s stock price which states that share value equals the present value of all expected future dividends.

dividend payout ratio: Percentage of earnings paid out as dividends.

Dow Jones Industrial Average: Index of the investment performance of a portfolio of 30 БІАААмblue-chipБІАААн stocks.

Du Pont system: A breakdown of ROE and ROA into component ratios.

economic order quantity: Order size that minimizes total inventory costs.

economic value added (EVA): Term used by the consulting firm Stern Stewart for profit remaining after deduction of the cost of the capital employed.

effective annual interest rate: Interest rate that is annualized using compound interest.

efficient capital markets: Financial markets in which security prices rapidly reflect all relevant information about asset values.

equivalent annual cost: The cost per period with the same present value as the cost of buying and operating a machine.

eurobond: Bond that is marketed internationally.

eurodollars: Dollars held on deposit in a bank outside the United States.

EVA: See economic value added.

exchange rate: Amount of one currency needed to purchase one unit of another.

ex-dividend date: Date that determines whether a stockholder is entitled to a dividend payment; anyone holding stock before this date is entitled to a dividend.

expectations theory of exchange rates: Theory that expected spot exchange rate equals the forward rate.

face value: Payment at the maturity of the bond. Also called par value or maturity value.

Fed: See Federal Reserve.

Federal Reserve (the Fed): The central bank in the United States, responsible for setting interest rates.

financial assets: Claims to the income generated by real assets. Also called securities.

financial intermediary: Firm that raises money from many small investors and provides financing to businesses or other organizations by investing in their securities.

financial leverage: Debt financing amplifies the effects of changes in operating income on the returns to stockholders.

financial markets: Markets in which financial assets are traded.

financial risk: Risk to shareholders resulting from the use of debt.

financial slack: Ready access to cash or debt financing.

financing decision: Decision as to how to raise the money to pay for investments in real assets.

fixed costs: Costs that do not depend on the level of output.

floating-rate security: Security paying dividends or interest that vary with short-term interest rates.

forex: Abbreviation for foreign exchange; also abbreviated fx.

forward contract: Agreement to buy or sell an asset in the future at an agreed price.

forward rate of exchange: Exchange rate for a forward transaction.

fundamental analysts: Analysts who attempt to find under- or overvalued securities by analyzing fundamental information, such as earnings, asset values, and business prospects.

funded debt: Debt with more than 1 year remaining to maturity. \

future value: Amount to which an investment will grow after earning interest.

futures contract: Exchange-traded promise to buy or sell an asset in the future at a prespecified price. fx: Abbreviation for foreign exchange; also abbreviated forex.

GAAP: See generally accepted accounting principles.

general cash offer: Sale of securities open to all investors by an already-public company.

generally accepted accounting principles (GAAP): Procedures for preparing financial statements.

income statement: Financial statement that shows the revenues, expenses, and net income of a firm over a period of time.

inflation: Rate at which prices as a whole are increasing.

information content of dividends: Dividend increases send good news about cash flow and earnings. Dividend cuts send bad news.