50 Corporate Finance Terminologies

1Essential Financial Lexicon

• Net Present Value (NPV): The difference between the present value of cash inflows and outflows over a period of time.
• Internal Rate of Return (IRR): The discount rate that makes the net present value of all cash flows from a particular project equal to zero.
• Accounts Payable (AP): Money owed by a company to its creditors.
• Accounts Receivable (AR): Money owed to a company by its customers.
• Return on Investment (ROI): A measure of the profitability of an investment, calculated as net profit divided by the cost of the investment.
• Dividend: A portion of a company’s earnings distributed to shareholders.
• Cost of Capital: The return rate that a company must earn on an investment to maintain its market value and attract funds.
• Capital Budgeting: The process of planning and managing a firm’s long-term investments.
• Leverage: The use of borrowed capital (debt) in relation to equity to finance the purchase of assets.
• Capital Structure: The mix of different types of capital (debt, equity, etc.) used by a firm to finance its operations.
• Working Capital: The difference between a company’s current assets and current liabilities.
• Cash Flow: The net amount of cash being transferred into and out of a business.
• Earnings Per Share (EPS): The portion of a company’s profit allocated to each outstanding share of common stock.
• Price-to-Earnings (P/E) Ratio: A ratio for valuing a company by comparing its current share price to its per-share earnings.
• Beta: A measure of a stock’s volatility in relation to the overall market.
• Alpha: The excess return on an investment relative to the return of a benchmark index.
• Market Capitalization: The total market value of a company’s outstanding shares of stock.
• Initial Public Offering (IPO): The first sale of stock by a private company to the public.
• Debt Financing: Raising capital through borrowing (loans, bonds, etc.).
• Equity Financing: Raising capital through the sale of shares in the company.
• Cost of Goods Sold (COGS): Direct costs attributable to the production of goods sold by a company.
• Synergy: The concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts.
• Corporate Governance: The system of rules, practices, and processes by which a company is directed and controlled.
• Financial Statements: Formal records of the financial activities and position of a business, person, or other entity.
• Balance Sheet: A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
• Income Statement: A financial statement that shows a company’s revenues and expenses over a specific period of time.
• Cash Flow Statement: A financial statement that provides aggregate data regarding all cash inflows and outflows a company receives.
• Return on Equity (ROE): A measure of financial performance, calculated by dividing net income by shareholders’ equity.
• Return on Assets (ROA): An indicator of how profitable a company is relative to its total assets, calculated by dividing net income by total assets.
• Capital Expenditure (CapEx): Funds used by a company to acquire, upgrade, and maintain physical assets.
• Mergers and Acquisitions (M&A): The process of consolidating companies or assets through various types of financial transactions.
• Debt-to-Equity Ratio: A measure of a company’s financial leverage, calculated by dividing its total liabilities by shareholders’ equity.
• Operating Expenses (OpEX): Costs required for the day-to-day functioning of a business, excluding COGS.
• Overheads: Ongoing business expenses not directly attributed to creating a product or service.
• Depreciation: The systematic reduction of the recorded cost of a fixed asset over its useful life.
• Amortization: The spreading of payments over multiple periods, or the process of writing off the cost of an intangible asset over its useful life.
• Goodwill: An intangible asset that arises when a buyer acquires an existing business, representing the excess of the purchase price over the fair value of net identifiable assets.
• Shareholders’ Equity: The owners’ residual interest in the assets of a company after deducting liabilities.
• Treasury Stock: Previously outstanding stock that has been repurchased by the issuing company.
• Free Cash Flow (FCF): The cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
• Leveraged Buyout (LBO): The acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition.
• Discount Rate: The interest rate used to discount future cash flows of a financial instrument to present value.
• Yield: The income return on an investment, typically expressed as a percentage.
• Bond: A fixed income instrument that represents a loan made by an investor to a borrower.
• Opportunity Cost: The cost of forgoing the next best alternative when making a decision.
• Principal: The original sum of money borrowed or invested, excluding any interest or dividends.
• Coupon Rate: The interest rate paid by bond issuers on the bond’s face value.
• Hedge: An investment to reduce the risk of adverse price movements in an asset.