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initial public offering IPO

First offering of stock to the general public.

interest rate parity: Theory that forward premium equals interest rate differential.

interest tax shield: Tax savings resulting from deductibility of interest payments.

internal growth rate: Maximum rate of growth without external financing.

internal rate of return (IRR): Discount rate at which project NPV = 0.

internally generated funds: Cash reinvested in the firm; depreciation plus earnings not paid out as dividends.

international Fisher effect: Theory that real interest rates in all countries should be equal, with differences in nominal rates reflecting differences in expected inflation.

in the black: Making a profit.

in the red: Making a loss.

investment grade: Bonds rated Baa or above by Moody`s or BBB or above by Standard & Poor`s.

issued shares: Shares that have been issued by the company.

IPO: See initial public offering.

IRR: See internal rate of return.

junk bond: Bond with a rating below Baa or BBB.

law of one price: Theory that prices of goods in all countries should be equal when translated to a common currency.

lease: Long-term rental agreement.

leveraged buyout (LBO): Acquisition of the firm by a private group using substantial borrowed funds.

limited liability: The owners of the corporation are not personally responsible for its obligations.

line of credit: Agreement by a bank that a company may borrow at any time up to an established limit.

liquidation: Sale of bankrupt firm`s assets.

liquidation value: Net proceeds that would be realized by selling the firm`s assets and paying off its creditors.

liquidity: Ability of an asset to be converted to cash quickly at low cost.

lock-box system: System whereby customers send payments to a post office box and a local bank collects and processes checks.

long position: Purchase of an investment.

majority voting: Voting system in which each director is voted on separately.

management buyout (MBO): Acquisition of the firm by its own management in a leveraged buyout.

M&A: Abbreviation for mergers and acquisitions.

marginal tax rate: Additional taxes owed per dollar of additional income.

market index: Measure of the investment performance of the overall market.

market portfolio: Portfolio of all assets in the economy. In practice a broad stock market index, such as the Standard & Poor`s Composite, is used to represent the market.

market risk: Economywide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk.

market risk premium: Risk premium of market portfolio. Difference between market return and return on risk-free Treasury bills.

market value added: Market value of equity minus book value.

market-value balance sheet: Financial statement that uses the market value of all assets and liabilities.

maturity premium: Extra average return from investing in long versus short-term Treasury securities.

merger: Combination of two firms into one, with the acquirer assuming assets and liabilities of the target firm.

MM dividend-irrelevance proposition: Theory that under idea conditions, the value of the firm is unaffected by dividend policy.

MM`s proposition I (debt irrelevance proposition): The value of a firm is unaffected by its capital structure.

MM`s proposition II: The required rate of return on equity increases as the firm`s debt-equity ratio increases.

Modified Accelerated Cost Recovery System (MACRS): Depreciation method that allows higher tax deductions in early years and lower deductions later.

money market: Market for short-term financial assets.

mutually exclusive projects: Two or more projects that cannot be pursued simultaneously.

net float: Difference between payment float and availability float.

net present value (NPV): Present value of cash flows minus initial investment.

net working capital: Current assets minus current liabilities.

net worth: Book value of common stockholders` equity plus preferred stock.

nominal interest rate: Rate at which money invested grows.

NPV: See net present value.

NYSE: New York Stock Exchange.

open account: Agreement whereby sales are made with no formal debt contract.

operating leverage: Degree to which costs are fixed.

operating risk (business risk): Risk in firm`s operating income.

opportunity cost of capital: Expected rate of return given up by investing in a project.

opportunity cost: Benefit or cash flow forgone as a result of an action.

OTC: See over-the-counter.

outstanding shares: Shares that have been issued by the company and are held by investors.

over-the-counter (OTC): Shares traded off an organized exchange Also used to refer to the Nasdaq market.

par value: Value of security shown on certificate.

partnership: Business owned by two or more persons who are personally responsible for all its liabilities.

payback period: Time until cash flows recover the initial investment of the project.