Valuation of Securities

Vocabulary

balance sheet

financial statement that provides a snapshot of the assets, liabilities, and equity of a business at a point in time

bond

financial instrument representing a loan made to a governmental or corporate body by some entity that requires repayment of the initial loan price plus interest on a fixed schedule

business risk

possibility that a venture will not generate the expected profits

capital expenditure

cost incurred to purchase a fixed asset, enhance an existing fixed asset, or extend its useful life, benefiting future periods

cash flow

total volume of money that moves into and out of a company for a given period

cash flow from financing activity

cash transactions relating to liability and shareholders' equity items that relate to obtaining and repaying borrowed amounts from creditors, as well as obtaining capital from shareholders

cash flow from investing activity

cash transactions relating to transactions and events that relate to acquiring and disposing of investments and productive long-lived assets

cash flow from operating activity

all cash transactions relating to transactions and events that relate to functions of a business directly connected to providing its goods and/or services to the market

discounted cash flow

forecasted future cash flow reduced by a given discount rate in order to reflect its present value

exchange rate risk

uncertainty caused by fluctuations in relative value between two or more currencies

financial risk

potential that a firm will not be able to meet its debt obligations

free cash flow

discretionary funds that remain after a company has paid its operating expenses and capital expenditures

free cash flow to equity

volume of cash that is available to investors once a firm has accounted for expenses, investments, and debt obligation payments

free cash flow to the firm

cash available from operations for distribution to investors, both equity and debt holders, after deducting taxes, investments, and working capital

future value

measure of what an investment made today will be worth in the future, given number of periods, interest rate, and amount invested

inflation

continual increase in the average price levels of goods and services

market efficiency

degree to which valuation of a security fully reflects all available information

present value

value in current dollars of a future payment discounted to the present

purchasing power risk

probability that a firm will be unable to compensate for increases in inflation and will experience inflated expenses and damaged profitability

rate of return

return on investment over a given amount of time, conveyed as a percentage of the investment's original investment value

risk

probability that the actual performance of a security will diverge from the anticipated return

statement of cash flows

one of the four major financial statements, representing an organization's cash receipts and payments by operating, investing, and financing activity

stock

share of ownership of a corporation

strong form efficient market

marketplace based on the idea that all information, public and private, is already fully reflected in a security's current trading price

tax risk

influence on income presented through changes to tax policy and various rates domestically or abroad

time value of money

concept that the value of money is sensitive to the passage of time, whereby the purchasing power of money can increase or decrease by the mere passage of time

weighted average cost of capital (WACC)

formula for determining the relative average a company is expected to pay to all its security holders to finance its assets

working capital

current assets minus current liabilities, which can help determine the business entity's ability to pay current liabilities

yield to maturity (YTM)

return on a bond from the date of purchase through the date of maturity, expressed as an annual percentage