17 rigorous units inspired by Fundamentals of Financial Management (Brigham & Houston) — built for real-world application and community wealth.
| Business Goal | Short-Term Focus | Long-Term Focus |
|---|---|---|
| Profit Maximization | Maximize current earnings | May sacrifice growth investment |
| Wealth Maximization | Maximize stock price today | Maximize intrinsic value over time |
| Stakeholder Value | Balance all stakeholders | Sustainable community impact |
| ESG-Centered | Social & environmental metrics | Long-run reputation & compliance |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| A | ||
| Agency Cost noun |
The total cost arising from the separation of ownership and control in a firm — including monitoring costs, bonding costs, and residual loss. | Ex: Paying an outside auditor $500,000 to verify management's financial reports is an agency monitoring cost borne by shareholders. |
| Agency Problem noun |
The conflict of interest that arises when an agent (manager) may make decisions that benefit themselves rather than the principal (shareholder). | Ex: A CEO who avoids a risky but profitable project to protect her own job security is exhibiting an agency problem. |
| Agency Relationship noun |
A formal arrangement where one party (the agent) acts on behalf of another (the principal). In corporate finance: managers act for shareholders. | Ex: Shareholders electing a board of directors to oversee corporate managers establishes an agency relationship. |
| Asymmetric Information noun |
A situation where one party to a transaction has more or better information than the other — managers typically know more than outside investors. | Ex: A CFO who knows next quarter's earnings will miss forecasts while investors do not possesses asymmetric information. |
| B | ||
| Bonding Cost noun |
Expenditures made by an agent to signal trustworthiness to the principal — part of total agency costs, borne by the manager. | Ex: A manager accepting a pay package tied mostly to long-term stock options is bonding her interests to shareholder wealth. |
| Business Ethics noun |
The application of ethical principles — honesty, fairness, integrity — to business decisions. Ethical behavior is also financially smart: violations destroy long-run value. | Ex: Enron's accounting fraud boosted short-term profits but destroyed the entire enterprise — a textbook business ethics failure. |
| C | ||
| Capital Budgeting noun |
The process of evaluating and selecting long-term investments — deciding which assets the firm should purchase. One of the three core financial decisions. | Ex: A BBYM enterprise deciding whether to spend $40,000 on a commercial kitchen is making a capital budgeting decision. |
| Capital Structure noun |
The mix of debt and equity used to finance a firm's assets — determining how investments are funded. | Ex: A bakery with $60,000 in bank loans and $40,000 in owner investment has a capital structure of 60% debt, 40% equity. |
| Corporate Governance noun |
The system of rules and processes by which a company is directed and controlled — designed to reduce agency problems and protect shareholders. | Ex: Requiring that at least half the board be independent directors is a corporate governance mechanism. |
| E | ||
| ESG noun |
Environmental, Social, and Governance — a framework for evaluating a company's non-financial performance across three dimensions used by investors to assess long-run sustainability. | Ex: A company with low emissions (E), fair labor practices (S), and diverse independent directors (G) scores well on ESG. |
| F | ||
| Financial Management noun |
The process of planning, organizing, directing, and controlling a firm's financial activities to achieve its goals — answering where to invest, how to finance, and how to manage cash. | Ex: A BBYM director who creates a budget, tracks monthly expenses, and evaluates grant vs. loan options is practicing financial management. |
| I | ||
| Intrinsic Value noun |
The true underlying worth of a firm based on fundamentals — expected future cash flows, growth, and risk — discounted to present value. May differ from market price. | Ex: If a stock's intrinsic value is $80 but it trades at $60, a value investor sees it as undervalued and buys it. |
| M | ||
| Market Price noun |
The price at which an asset currently trades in the market, reflecting collective buyer/seller judgment. May be above or below intrinsic value. | Ex: During the 2008 crisis, many bank stocks traded at market prices well below their fundamental intrinsic value due to panic selling. |
| Monitoring Cost noun |
Expenditures by principals (shareholders) to observe and constrain agent (manager) behavior — audits, board oversight, legal compliance. | Ex: Hiring an independent accounting firm to audit financial statements annually is a monitoring cost borne by shareholders. |
| N | ||
| Net Worth noun |
Total assets minus total liabilities. For an individual, what you own minus what you owe. For a firm, equals stockholders' equity. | Ex: A student with $10,000 in savings and a $6,000 student loan has a net worth of $4,000. |
| P | ||
| Principal noun |
In an agency relationship, the party on whose behalf the agent acts — affected by the agent's decisions. Shareholders are principals in a corporation. | Ex: Shareholders are the principals of a publicly traded firm — they hire a CEO (the agent) to run the business. |
| Profit Maximization noun |
A firm objective focused on maximizing near-term accounting profit. Considered inferior to wealth maximization because it ignores risk and timing. | Ex: A firm cutting all R&D to boost this year's earnings pursues profit maximization at the expense of future value. |
| S | ||
| Shareholder Wealth Maximization noun |
The primary goal of the firm in corporate finance: maximize the long-run intrinsic value of the firm's stock, accounting for magnitude, timing, and risk of cash flows. | Ex: A company investing in a 10-year R&D program with huge long-run payoff is pursuing shareholder wealth maximization. |
| Stakeholder noun |
Any individual or group affected by the firm's decisions — shareholders, employees, customers, suppliers, creditors, communities, and the environment. | Ex: When a factory closes in Birmingham, stakeholders include workers, local suppliers, the city, and families — not just shareholders. |
| T | ||
| The Swanson Initiative proper noun |
BBYM's trust fund framework applying community wealth principles through structured savings, cooperative investment, and community grant-making. | Ex: The Swanson Initiative ensures financial gains from BBYM youth enterprises are reinvested in the community, not extracted. |
| W | ||
| Working Capital Management noun |
Managing the firm's short-term assets (cash, receivables, inventory) and short-term liabilities to ensure daily obligations are met efficiently. | Ex: A bakery deciding how much flour to hold in inventory and when to collect from wholesale customers is managing working capital. |
| Market Type | Maturity | Examples | Risk Level |
|---|---|---|---|
| Money Market | < 1 year | T-Bills, CDs, Commercial Paper | Low |
| Capital Market | > 1 year | Stocks, Bonds, Mortgages | Medium–High |
| Primary Market | New Issues | IPOs, New Bond Issues | Variable |
| Secondary Market | Existing | NYSE, NASDAQ, OTC | Variable |
| Derivatives Market | Variable | Options, Futures, Swaps | High |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| C | ||
| Capital Market noun |
A financial market for long-term securities with maturities greater than one year — stocks, bonds, mortgages. The primary source of long-term financing. | Ex: When Apple issues 30-year bonds or sells stock, it operates in the capital market. |
| CDFI noun |
Community Development Financial Institution — a Treasury-certified, mission-driven lender serving communities underserved by traditional banks. | Ex: A BBYM student turned down by a commercial bank might find fair loan terms and financial coaching at a local CDFI. |
| Commercial Bank noun |
A for-profit financial institution accepting public deposits and making loans. Deposits insured by the FDIC up to $250,000. | Ex: Regions Bank and Wells Fargo are commercial banks — they accept deposits and use that money to fund loans. |
| Credit Union noun |
A nonprofit, member-owned financial cooperative offering the same services as a bank but structured to serve members. Deposits insured by the NCUA. | Ex: A teacher who joins her district's credit union gets lower-fee checking and better loan rates because it's nonprofit. |
| D | ||
| Derivative noun |
A financial contract whose value is derived entirely from an underlying asset, index, or rate — types include options, futures, forwards, and swaps. | Ex: A wheat futures contract locking in $6 per bushel for March delivery derives its value from the expected future price of wheat. |
| F | ||
| FDIC noun |
Federal Deposit Insurance Corporation — insures deposits at member banks up to $250,000 per depositor per institution. Created in 1933. | Ex: When Silicon Valley Bank failed in 2023, depositors with up to $250,000 were protected and reimbursed by the FDIC within days. |
| Federal Funds Rate noun |
The target rate set by the Fed at which banks lend reserves to each other overnight — the key policy rate that ripples through all borrowing costs. | Ex: When the Fed raised the federal funds rate above 5% in 2023, mortgage rates climbed above 7%, cooling the housing market. |
| Federal Reserve noun |
The central bank of the United States. Controls monetary policy via open market operations, the federal funds rate, and reserve requirements. Dual mandate: max employment and stable prices. | Ex: When inflation hit 9% in 2022, the Federal Reserve raised interest rates aggressively to slow borrowing and cool prices. |
| Financial Intermediary noun |
Any institution that channels funds from savers (surplus units) to borrowers (deficit units). Reduces transaction costs and manages information asymmetry. | Ex: A commercial bank pools deposits from thousands of savers and uses them to make loans — a classic financial intermediary. |
| Financial Market noun |
Any organized system allowing buyers and sellers to trade financial assets. Functions: allocates capital, sets prices, provides liquidity, distributes risk. | Ex: The New York Stock Exchange is a financial market where shares are bought and sold at transparent, publicly reported prices. |
| Futures Contract noun |
A standardized, exchange-traded contract obligating parties to buy/sell an asset at a set price on a future date. Used to hedge price risk or speculate. | Ex: A farmer sells corn futures at $5/bushel for the fall harvest, locking in revenue even if market prices fall. |
| I | ||
| Initial Public Offering (IPO) noun |
The first sale of a company's stock to the public on the primary market. The company receives the proceeds and becomes publicly traded. | Ex: When a BBYM social enterprise sells shares to the public for the first time, it is conducting an IPO. |
| Investment Bank noun |
A financial institution helping corporations and governments raise capital by underwriting and distributing securities. Does NOT accept deposits or make retail loans. | Ex: Goldman Sachs acted as Airbnb's investment bank for its IPO — pricing shares and distributing them to institutional investors. |
| L | ||
| Liquidity noun |
The ease and speed of converting an asset into cash without significant value loss. Cash is perfectly liquid; real estate is illiquid. Less liquid assets demand a liquidity premium. | Ex: Treasury bills are highly liquid — sold in seconds at near-face value. Private company shares may take years to liquidate. |
| M | ||
| Money Market noun |
A market for short-term debt instruments with maturities of one year or less. High liquidity, low risk, low return. Instruments include T-bills, commercial paper, and CDs. | Ex: A corporation with $10 million in spare cash for 60 days parks it in the money market to earn a safe return. |
| N | ||
| NASDAQ noun |
The first fully electronic stock exchange (founded 1971). Home to major tech companies — Apple, Microsoft, Amazon, Meta, Google. | Ex: When you buy Amazon shares through a brokerage app, the trade is most likely executed on NASDAQ's electronic system. |
| NYSE noun |
New York Stock Exchange — the world's largest stock exchange by market cap, founded 1792. Lists blue-chip companies; a secondary market for stocks. | Ex: Buying ExxonMobil stock on the NYSE means you're buying from another investor — Exxon received its money back at its original IPO. |
| O | ||
| Open Market Operations noun |
The Fed's most frequently used tool — buying or selling U.S. Treasury securities to inject or remove money from the banking system and influence rates. | Ex: During COVID-19, the Fed bought trillions in Treasury bonds (open market operations) to inject cash and keep rates near zero. |
| Option noun |
A derivative giving the holder the right — but not obligation — to buy (call) or sell (put) an asset at a specified price before a set date. | Ex: An investor buys a call option on Apple at $200 strike — if Apple rises to $230, she profits; if it falls, she loses only the premium. |
| P | ||
| Payday Lender noun |
A short-term, high-cost lender offering small loans repayable on the borrower's next payday. Typical APRs: 300–400%. Considered predatory. | Ex: A $400 payday loan with a $60 fee due in two weeks carries an APR of 391% — far more expensive than a credit union at 18%. |
| Predatory Lending noun |
Lending practices that exploit borrowers through deceptive terms, excessive fees, and targeting of financially vulnerable people. | Ex: A lender charging undisclosed origination fees and encouraging loan rollovers in low-income Birmingham neighborhoods is predatory. |
| Primary Market noun |
The market where new securities are issued for the first time. The issuing company receives the proceeds. IPOs are the main primary market transaction. | Ex: A company selling 10 million new shares at $20 each in its IPO receives $200 million directly — that's the primary market. |
| R | ||
| Reserve Requirement noun |
The minimum fraction of deposits banks must hold in reserve rather than lend out. A Fed tool for controlling the money supply. | Ex: With a 10% reserve requirement, a bank receiving $1,000 in deposits must hold $100 and may lend up to $900. |
| S | ||
| Secondary Market noun |
The market where previously issued securities trade between investors. The issuing company receives no proceeds. NYSE and NASDAQ are secondary markets. | Ex: When you sell shares on Robinhood, you're in the secondary market — the company is uninvolved and receives no money. |
| Securitization noun |
Pooling individual loans and selling interests in that pool to investors as a new security. Frees up bank capital but can create systemic risk. | Ex: A bank bundles 1,000 car loans and sells auto-loan-backed securities to investors — turning illiquid loans into tradeable securities. |
| T | ||
| Treasury Bill (T-Bill) noun |
A short-term U.S. government debt instrument (≤1 year). The safest, most liquid money market instrument — sold at a discount to face value. | Ex: A 90-day T-bill bought at $990 matures at $1,000 — the $10 difference is the investor's interest for the 90-day period. |
| Statement | What It Shows | Key Line Items |
|---|---|---|
| Balance Sheet | Financial position at a point in time | Assets, Liabilities, Equity |
| Income Statement | Profitability over a period | Revenue, COGS, EBIT, Net Income |
| Cash Flow Statement | Cash movement over a period | Operating, Investing, Financing |
| Statement of Equity | Changes in ownership value | Retained earnings, Dividends paid |
| 2024 Federal Tax Bracket | Rate |
|---|---|
| $0 – $11,600 | 10% |
| $11,601 – $47,150 | 12% |
| $47,151 – $100,525 | 22% |
| $100,526 – $191,950 | 24% |
| $191,951+ | 32–37% |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| A | ||
| Accounts Payable (AP) noun |
A current liability representing money owed to suppliers for goods/services received but not yet paid. An increase in AP is a source of cash. | Ex: A bakery receiving $10,000 of flour in November but paying in January shows $10,000 in Accounts Payable on its November balance sheet. |
| Accounts Receivable (AR) noun |
A current asset representing money owed by customers for goods/services delivered but not yet collected. An increase in AR uses cash. | Ex: A print shop completing a $5,000 job in December but collecting in February shows $5,000 in AR on its December balance sheet. |
| Average Tax Rate noun |
Total income taxes paid ÷ total taxable income. The overall fraction of income paid as taxes. Always ≤ the marginal rate in a progressive system. | Ex: A person earning $55,000 who pays $7,480 in taxes has an average tax rate of 13.6% — though her marginal rate is 22%. |
| B | ||
| Balance Sheet noun |
A financial statement showing assets, liabilities, and equity at a single point in time. Must satisfy: Assets = Liabilities + Stockholders' Equity. | Ex: A December 31 balance sheet shows Total Assets $280,000, Total Liabilities $125,000, and Equity $155,000 — it balances exactly. |
| C | ||
| Capital Expenditure (CapEx) noun |
Cash spent purchasing or improving long-term assets. NOT immediately expensed on the income statement — capitalized and depreciated over time. Deducted in the FCF calculation. | Ex: A bakery buying a $50,000 commercial oven records CapEx — the $50K cash outflow hits FCF now but only $5K/year appears on the income statement. |
| Cost of Goods Sold (COGS) noun |
Direct costs of producing goods sold — raw materials, direct labor, manufacturing overhead. Subtracted from Revenue to get Gross Profit. | Ex: A bakery with $320,000 in revenue and $140,000 in COGS (flour, labor, packaging) earns Gross Profit of $180,000. |
| D | ||
| Depreciation noun |
The non-cash, systematic allocation of a long-term asset's cost over its useful life. Reduces taxable income but no cash leaves the firm. Added back when computing OCF. | Ex: A $50,000 oven over 10 years shows $5,000 of depreciation expense annually — reducing taxable income without affecting cash. |
| Depreciation Tax Shield noun |
The tax savings generated by the depreciation deduction: Depreciation × Tax Rate. The government subsidizes asset use through this deduction. | Ex: With $18,000 depreciation and a 25% tax rate, the tax shield = $18,000 × 25% = $4,500 in annual tax savings. |
| E | ||
| EBIT noun |
Earnings Before Interest and Taxes — also called Operating Income. Revenue minus all operating costs including D&A but before interest and taxes. Starting point for NOPAT. | Ex: An enterprise with Gross Profit $180,000, OpEx $60,000, and D&A $18,000 has EBIT of $102,000. |
| EBITDA noun |
Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash generation, useful for comparing firms across different capital structures. | Ex: Two bakeries with identical operations but different debt levels will have the same EBITDA — because it strips out interest expense. |
| EBT (Earnings Before Tax) noun |
EBIT minus Interest Expense. The profit base on which income taxes are calculated. Also called Pre-Tax Income. | Ex: A bakery with EBIT of $102,000 and interest of $7,000 has EBT of $95,000 — the amount subject to the 25% tax rate. |
| F | ||
| Free Cash Flow (FCF) noun |
OCF minus CapEx minus change in NWC. The cash available to ALL investors after funding operations and investment. The basis for firm valuation. | Ex: With OCF $94,500, CapEx $22,000, and ΔNWC $8,000, FCF = $64,500 — the cash truly available to pay investors. |
| G | ||
| Gross Profit noun |
Revenue minus Cost of Goods Sold. The first profitability line on the income statement — measures pricing power over direct production costs. | Ex: A bakery with $320,000 in sales and $140,000 COGS earns Gross Profit of $180,000 — a 56.25% gross margin. |
| I | ||
| Income Statement noun |
A financial statement showing revenues, expenses, and profit over a period. Flows: Revenue → Gross Profit → EBITDA → EBIT → EBT → Net Income. | Ex: A quarterly income statement is a 'movie' of performance over three months — unlike the Balance Sheet, which is a snapshot. |
| M | ||
| Marginal Tax Rate noun |
The rate applied to the next dollar of income earned. ALWAYS used in financial decisions — evaluating raises, deductions, after-tax cost of debt. | Ex: A taxpayer in the 22% bracket who receives a $1,000 bonus keeps $780 — the 22% marginal rate applies to each additional dollar. |
| N | ||
| Net Income noun |
The final bottom line after all expenses including COGS, SG&A, D&A, interest, and taxes. Belongs to shareholders — paid as dividends or kept as Retained Earnings. | Ex: With EBT of $95,000 and taxes of $23,750 (25%), Net Income = $71,250 — the after-tax profit belonging to owners. |
| Net Working Capital (NWC) noun |
Current Assets minus Current Liabilities. Short-term liquidity buffer. An increase in NWC uses cash (reduces FCF); a decrease releases cash. | Ex: A firm with Current Assets $90,000 and Current Liabilities $45,000 has NWC of $45,000 to cushion near-term obligations. |
| NOPAT noun |
Net Operating Profit After Tax = EBIT × (1 − Tax Rate). Operating profit after taxes, before financing effects. Starting point for OCF. | Ex: With EBIT $102,000 and tax rate 25%, NOPAT = $102,000 × 0.75 = $76,500 — what operations generate after taxes with no debt. |
| O | ||
| Operating Cash Flow (OCF) noun |
NOPAT + Depreciation. Actual after-tax cash generated by operations. Depreciation is added back because it reduced NOPAT on paper but involved no cash outflow. | Ex: With NOPAT $76,500 and Depreciation $18,000, OCF = $94,500 — the real cash generated by operations after taxes. |
| P | ||
| Progressive Tax System noun |
A tax structure where higher income levels face higher marginal rates — but each rate applies ONLY to income within that bracket, not all income. | Ex: Under a progressive system, the 22% rate applies only to income above $44,000 — not to the full $55,000. |
| R | ||
| Retained Earnings noun |
Cumulative past Net Incomes kept in the business rather than paid out as dividends. An equity account on the balance sheet — NOT a cash account. | Ex: A firm with 10 years of $50,000 Net Income and zero dividends has $500,000 in Retained Earnings — reinvested, not stored as cash. |
| S | ||
| Statement of Cash Flows noun |
Shows actual cash sources and uses over a period in three sections: Operating, Investing, and Financing. Reconciles Net Income to the change in cash balance. | Ex: A bakery with $50,000 Net Income but $80,000 CapEx might show a negative Statement of Cash Flows — cash declined despite profitability. |
| W | ||
| W-2 Form noun |
Employer-issued tax document showing total wages (Box 1) and federal income tax withheld (Box 2) for the year. Used to file personal income tax returns. | Ex: A BBYM student who worked in 2024 receives a W-2 in January 2025 showing total wages and how much federal tax was withheld. |
| Ratio Category | Ratio | Formula | Healthy Range |
|---|---|---|---|
| Liquidity | Current Ratio | CA / CL | 1.5 – 3.0 |
| Liquidity | Quick Ratio | (CA − Inventory) / CL | 1.0 – 2.0 |
| Profitability | Net Profit Margin | Net Income / Sales | 5–20%+ |
| Profitability | ROE | Net Income / Equity | 15–25% |
| Debt | Debt Ratio | Total Debt / Total Assets | < 0.50 |
| Market | P/E Ratio | Market Price / EPS | 10–25× |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| A | ||
| Asset Turnover Ratio noun |
Net Sales ÷ Total Assets. Measures how efficiently a firm uses its assets to generate sales. | Ex: A bakery with $320,000 in sales and $200,000 in assets has an asset turnover of 1.6× — generating $1.60 in sales per $1 of assets. |
| B | ||
| Benchmarking noun |
Comparing a firm's financial ratios to industry averages or top competitors to identify strengths and weaknesses. | Ex: Comparing BBYM's enterprise gross margin (56%) to the industry average (48%) shows it has above-average pricing power. |
| C | ||
| Current Ratio noun |
Current Assets ÷ Current Liabilities. Measures short-term liquidity — ability to pay bills due within one year. A ratio above 1.0 means more liquid assets than near-term obligations. | Ex: A firm with Current Assets of $90,000 and Current Liabilities of $45,000 has a current ratio of 2.0 — healthy short-term liquidity. |
| D | ||
| Days Sales Outstanding (DSO) noun |
Accounts Receivable ÷ (Annual Sales ÷ 365). Measures how many days on average it takes to collect payment after a sale. | Ex: With AR of $35,000 and daily sales of $877, DSO = 40 days — meaning customers take about 40 days to pay their bills. |
| Debt Ratio noun |
Total Liabilities ÷ Total Assets. Measures the fraction of assets financed by debt. Higher ratios mean more financial risk. | Ex: A firm with $125,000 in liabilities and $280,000 in assets has a debt ratio of 44.6% — less than half of assets are debt-financed. |
| DuPont Analysis noun |
A method that decomposes Return on Equity (ROE) into three drivers: profit margin × asset turnover × equity multiplier. Identifies the source of ROE changes. | Ex: If ROE improves, DuPont analysis reveals whether it came from better margins, faster asset use, or increased financial leverage. |
| E | ||
| Equity Multiplier noun |
Total Assets ÷ Stockholders' Equity. Measures financial leverage — how much total asset value is supported by each dollar of equity. | Ex: A firm with Assets of $280,000 and Equity of $155,000 has an equity multiplier of 1.81× — $1.81 of assets per $1 of equity. |
| F | ||
| Fixed Asset Turnover noun |
Net Sales ÷ Net Fixed Assets (PP&E). Measures how efficiently long-term assets generate revenue. | Ex: With $320,000 in sales and $160,000 in net PP&E, fixed asset turnover = 2.0× — generating $2 in sales per $1 of fixed assets. |
| G | ||
| Gross Profit Margin noun |
Gross Profit ÷ Net Sales. The percentage of each revenue dollar remaining after covering direct production costs. | Ex: A bakery with Gross Profit of $180,000 and Revenue of $320,000 has a gross profit margin of 56.25%. |
| I | ||
| Inventory Turnover noun |
Cost of Goods Sold ÷ Inventory. Measures how many times per year a firm sells through its entire inventory. | Ex: With COGS of $140,000 and average inventory of $35,000, turnover = 4.0× — the bakery cycles through inventory every 91 days. |
| L | ||
| Liquidity Ratios noun |
Ratios measuring a firm's ability to meet short-term obligations — primarily the Current Ratio and Quick Ratio. | Ex: Lenders check a small business's liquidity ratios to assess whether it can pay back a short-term loan without a cash crisis. |
| N | ||
| Net Profit Margin noun |
Net Income ÷ Net Sales. The percentage of each revenue dollar that becomes bottom-line profit after all expenses. | Ex: With Net Income $71,250 and Revenue $320,000, net profit margin = 22.3% — over $0.22 of profit per dollar of sales. |
| P | ||
| Price-to-Earnings Ratio (P/E) noun |
Market Price per Share ÷ Earnings per Share. Measures how much investors pay per dollar of earnings. Higher P/E implies higher growth expectations. | Ex: A stock trading at $50 with EPS of $5 has a P/E of 10× — investors pay $10 for each $1 of annual earnings. |
| Q | ||
| Quick Ratio (Acid-Test) noun |
(Current Assets − Inventory) ÷ Current Liabilities. A stricter liquidity measure that excludes inventory (hardest current asset to liquidate quickly). | Ex: A firm with CA $90,000, Inventory $35,000, and CL $45,000 has a quick ratio of 1.22 — adequate short-term liquidity excluding slow inventory. |
| R | ||
| Return on Assets (ROA) noun |
Net Income ÷ Total Assets. Measures how efficiently management uses all assets to generate profit. | Ex: With Net Income $71,250 and Total Assets $280,000, ROA = 25.4% — generating $0.25 of profit for every dollar of assets owned. |
| Return on Equity (ROE) noun |
Net Income ÷ Stockholders' Equity. Measures return generated for shareholders on their investment. The most important profitability metric for equity investors. | Ex: With Net Income $71,250 and Equity $155,000, ROE = 46% — shareholders earned $0.46 for each dollar they have invested. |
| T | ||
| Times Interest Earned (TIE) noun |
EBIT ÷ Interest Expense. Measures ability to cover interest payments from operating profit. Higher is safer for creditors. | Ex: With EBIT $102,000 and interest $7,000, TIE = 14.6× — the firm earns 14.6 times its annual interest obligation from operations alone. |
| Trend Analysis noun |
Analyzing a firm's financial ratios over multiple years to identify improving or deteriorating performance patterns. | Ex: Comparing BBYM enterprise's ROE over five years — rising from 20% to 46% — shows a positive trend in shareholder returns. |
| $1,000 Invested at 7% | 5 Years | 10 Years | 20 Years | 30 Years |
|---|---|---|---|---|
| Annual Compounding | $1,403 | $1,967 | $3,870 | $7,612 |
| Monthly Compounding | $1,417 | $2,009 | $4,039 | $8,117 |
| Daily Compounding | $1,419 | $2,014 | $4,055 | $8,155 |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| A | ||
| Amortization Schedule noun |
A table showing each loan payment broken down into its interest and principal components, and the remaining balance after each payment. | Ex: A 30-year mortgage amortization schedule shows that early payments are mostly interest, while later payments are mostly principal. |
| Annuity noun |
A series of equal payments made at regular intervals over a fixed period. An ordinary annuity pays at the end of each period; an annuity due pays at the beginning. | Ex: Monthly car payments of $350 for 60 months is an ordinary annuity — equal payments made at the end of each month. |
| Annuity Due noun |
An annuity where payments occur at the BEGINNING of each period. Worth more than an ordinary annuity because cash is received sooner. | Ex: Rent paid on the 1st of each month is an annuity due — each payment comes at the start of the period. |
| C | ||
| Compounding noun |
The process of earning interest on both the original principal AND previously earned interest. The engine of wealth-building over time. | Ex: Starting with $1,000 at 8% annual interest, compounding turns it into $2,159 after 10 years — not just $1,800. |
| D | ||
| Discount Rate noun |
The interest rate used to convert future cash flows to their present value. Reflects the opportunity cost of capital and the risk of the cash flows. | Ex: Using a 10% discount rate, a cash flow of $1,100 received one year from now is worth $1,000 today. |
| Discounting noun |
The process of calculating the present value of a future cash flow — the reverse of compounding. Determines what a future amount is worth in today's dollars. | Ex: Discounting $121 received in two years at 10% reveals its present value is $100 today. |
| E | ||
| Effective Annual Rate (EAR) noun |
The true annual interest rate when compounding occurs more frequently than once per year. Always ≥ the stated nominal rate. | Ex: A credit card with a 24% nominal rate compounded monthly has an EAR of 26.8% — the true annual cost of carrying a balance. |
| F | ||
| Future Value (FV) noun |
The value of a current amount of money at a future date after it has earned interest. Calculated as: FV = PV × (1 + r)^n | Ex: Investing $1,000 today at 8% for 10 years grows to FV = $1,000 × (1.08)^10 = $2,159. |
| Future Value of an Annuity (FVA) noun |
The total accumulated value of a series of equal periodic payments at a future date, including compound interest earned. | Ex: Saving $200/month at 6% annual rate for 20 years accumulates to an FVA of approximately $92,408. |
| G | ||
| Growth Rate (g) noun |
The rate at which cash flows, earnings, or dividends are expected to increase each period — used in perpetuity and stock valuation models. | Ex: A BBYM enterprise expecting revenues to grow 5% per year uses g = 5% in its valuation model. |
| N | ||
| Nominal Interest Rate noun |
The stated annual interest rate before adjusting for the frequency of compounding. Also called the APR (Annual Percentage Rate) in consumer lending. | Ex: A bank advertising a 12% nominal rate compounded monthly has a monthly rate of 1% and an EAR above 12%. |
| O | ||
| Ordinary Annuity noun |
An annuity where payments occur at the END of each period. The most common type in finance — mortgage payments, bond coupons. | Ex: A bond paying $50 coupon every six months is an ordinary annuity — payments come at the end of each period. |
| P | ||
| Perpetuity noun |
An annuity that pays forever — an infinite series of equal periodic payments. Present Value = PMT ÷ r. | Ex: A preferred stock paying $5 per year forever at a 10% discount rate has PV = $5 ÷ 0.10 = $50. |
| Present Value (PV) noun |
The current value of a future cash flow, discounted at an appropriate rate. The foundation of all valuation in finance: PV = FV ÷ (1 + r)^n. | Ex: Receiving $1,000 three years from now at a 10% discount rate is worth PV = $1,000 ÷ (1.10)^3 = $751 today. |
| Present Value of an Annuity (PVA) noun |
The current lump-sum value of a series of equal future payments, discounted at a given rate. | Ex: The PVA of $200/month for 60 months at 6% annual rate tells a car buyer how much she can afford to borrow today. |
| R | ||
| Rule of 72 noun |
A quick estimate: divide 72 by the interest rate to find how many years it takes money to double. Approximate but highly useful. | Ex: At 8% interest, money doubles in approximately 72 ÷ 8 = 9 years. At 12%, it doubles in just 6 years. |
| T | ||
| Time Value of Money (TVM) noun |
The principle that a dollar today is worth more than a dollar in the future — because today's dollar can be invested and earn a return. | Ex: TVM explains why receiving $1,000 today is better than $1,000 in five years — you could invest it and have $1,469 in five years at 8%. |
| Timeline noun |
A visual tool showing when each cash flow occurs in a TVM problem — time periods on the horizontal axis, cash flows above or below. | Ex: Drawing a timeline with $0 at t=0, payments of -$500 at t=1 through t=5, and a $3,000 lump sum at t=5 clarifies a complex TVM problem. |
| Credit Score Range | Rating | Typical Mortgage Rate | Monthly Pmt on $200K |
|---|---|---|---|
| 760 – 850 | Excellent | ~6.50% | ~$1,264 |
| 700 – 759 | Good | ~6.72% | ~$1,294 |
| 680 – 699 | Fair | ~6.89% | ~$1,317 |
| 660 – 679 | Below Avg | ~7.11% | ~$1,347 |
| 620 – 659 | Poor | ~7.55% | ~$1,407 |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| A | ||
| Annual Percentage Rate (APR) noun |
The yearly cost of borrowing expressed as a percentage, including fees. Required by law to be disclosed in consumer lending. May differ from EAR when compounding is frequent. | Ex: A car loan advertised at 7.9% APR compounded monthly has a true EAR slightly above 7.9%. |
| C | ||
| Credit Score noun |
A numerical score (typically 300–850) summarizing a borrower's creditworthiness based on payment history, amounts owed, length of credit history, and types of credit. | Ex: A BBYM student with a 750 credit score qualifies for better rates than one with a 620 — the difference can be thousands of dollars over a loan's life. |
| D | ||
| Default Risk Premium (DRP) noun |
The additional interest rate charged to compensate lenders for the risk that a borrower may not repay. Higher credit risk = higher DRP. | Ex: U.S. Treasury bonds have a DRP near zero; a startup with no credit history may face a DRP of 8% or more. |
| F | ||
| Federal Funds Rate noun |
The rate at which banks lend reserves overnight — set by the Federal Reserve as its primary policy tool. The benchmark from which all other rates derive. | Ex: When the Fed raised the federal funds rate from 0.25% to 5.25% in 2022–2023, every other borrowing rate in the economy moved higher. |
| I | ||
| Inflation Premium (IP) noun |
The component of interest rates that compensates lenders for the expected erosion of purchasing power due to inflation. | Ex: If expected inflation is 3%, lenders build a 3% IP into the nominal rate to ensure they receive real returns after inflation. |
| Interest Rate noun |
The price paid for borrowing money, expressed as a percentage of the amount borrowed per period. Determined by supply and demand for funds, risk, maturity, and monetary policy. | Ex: A 7% mortgage rate means the borrower pays $7 per year for every $100 borrowed — the cost of using the lender's capital. |
| Inverted Yield Curve noun |
A yield curve where short-term rates exceed long-term rates — historically a reliable predictor of economic recession. | Ex: When the 3-month T-bill yield exceeds the 10-year Treasury yield, the yield curve is inverted — often signaling a recession within 12–18 months. |
| L | ||
| Liquidity Premium (LP) noun |
The additional return demanded by investors for holding a less liquid (harder to sell) asset or a longer-term bond. | Ex: A 30-year Treasury bond pays a higher yield than a 3-month T-bill partly due to the liquidity premium for locking up money longer. |
| M | ||
| Maturity Risk Premium (MRP) noun |
The extra interest required by investors for holding longer-term bonds — compensating for the greater price volatility and uncertainty of longer maturities. | Ex: A 10-year bond pays more than a 1-year bond partly because of the MRP — locking in money for longer requires additional compensation. |
| N | ||
| Nominal Interest Rate noun |
The stated rate of interest — the sum of the real rate, inflation premium, and applicable risk premiums. Also called the quoted rate. | Ex: A bank quoting a 9% mortgage rate is stating the nominal rate — which includes the real return, expected inflation, and risk premiums. |
| R | ||
| Real Interest Rate noun |
The nominal interest rate minus the inflation rate — the actual purchasing-power return on an investment after removing inflation's effect. | Ex: With a nominal rate of 7% and inflation of 3%, the real interest rate is approximately 4% — the true increase in purchasing power. |
| Real Risk-Free Rate (r*) noun |
The interest rate that would exist on a risk-free security if no inflation were expected. The baseline return for pure time-value compensation. | Ex: If inflation were zero and there were no risk, a government bond might yield 2% — the real risk-free rate compensating for time preference. |
| Risk Premium noun |
The additional return above the risk-free rate required to compensate investors for taking on additional risk (default, liquidity, or maturity risk). | Ex: If the risk-free rate is 4% and a corporate bond yields 8%, the 4% difference is the risk premium for credit and liquidity risk. |
| T | ||
| Term Structure of Interest Rates noun |
The relationship between bond yields and their maturities at a given point in time — also called the yield curve. | Ex: The term structure shows whether short-term rates are above, below, or equal to long-term rates at any given moment. |
| Y | ||
| Yield Curve noun |
A graph plotting interest rates on the y-axis against maturities (time to payment) on the x-axis. Normal: upward sloping. Inverted: downward sloping. Flat: horizontal. | Ex: A normal yield curve shows 3-month T-bills at 4.5% and 10-year Treasuries at 6% — longer maturities earn higher yields. |
| Yield Spread noun |
The difference in yields between two bonds of different credit quality or maturity. Wider spreads indicate higher perceived risk. | Ex: If a corporate bond yields 8% and a Treasury of the same maturity yields 5%, the 3% yield spread reflects the corporate's credit risk. |
| Bond Rating | Agency | Meaning | Typical Yield Spread |
|---|---|---|---|
| AAA / Aaa | S&P / Moody's | Highest quality | +0.5–1.0% |
| AA / Aa | S&P / Moody's | High quality | +1.0–1.5% |
| A | Both | Upper medium grade | +1.5–2.0% |
| BBB / Baa | Both | Investment grade minimum | +2.0–3.0% |
| BB and below | Both | Speculative / "Junk" | +4.0%+ |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| B | ||
| Bond noun |
A long-term debt instrument where the issuer (borrower) promises to pay periodic coupon interest and return the face value at maturity. | Ex: The U.S. Treasury issues bonds to fund government spending — paying coupon interest every six months and face value at maturity. |
| Bond Rating noun |
A letter-grade assessment by rating agencies (Moody's, S&P, Fitch) of a bond issuer's ability to repay — from AAA (safest) to D (default). | Ex: A BBB-rated corporate bond is 'investment grade' — safer than a BB bond but riskier than an AAA, reflecting in higher required yields. |
| C | ||
| Call Provision noun |
A feature giving the bond issuer the right to redeem (buy back) bonds before maturity at a specified call price. Beneficial to issuers when rates fall. | Ex: A company that issued bonds at 8% can call them if rates drop to 5% and reissue at the lower rate — saving interest costs. |
| Callable Bond noun |
A bond with an embedded call provision — the issuer may redeem it early. Investors demand a higher yield to compensate for the reinvestment risk created by the call. | Ex: Investors buying callable bonds accept higher yields because the bond may be called away when rates fall — the worst time to reinvest. |
| Convertible Bond noun |
A corporate bond that can be converted into a specified number of shares of common stock at the holder's option. Hybrid security: bond + equity option. | Ex: A $1,000 convertible bond that converts into 20 shares gives the holder stock upside if the company's share price rises above $50. |
| Coupon Payment noun |
The periodic interest payment made by the bond issuer to bondholders — typically semi-annual. Calculated as: Coupon Rate × Face Value. | Ex: A $1,000 bond with a 6% coupon pays $60 per year — $30 every six months — until maturity. |
| Coupon Rate noun |
The annual interest rate stated on the bond, expressed as a percentage of face (par) value. Fixed at issuance — determines the dollar coupon payment. | Ex: A bond with a $1,000 face value and 5% coupon rate pays $50 in annual interest regardless of where the bond trades in the market. |
| Current Yield noun |
Annual Coupon Payment ÷ Current Market Price. Measures the annual income return from holding a bond at its current price. | Ex: A $1,000 bond with a $60 coupon trading at $900 has a current yield of 6.67% — higher than the 6% coupon rate because price fell. |
| D | ||
| Default Risk noun |
The risk that a bond issuer will fail to make scheduled coupon or principal payments. Higher default risk demands higher yields (wider spreads). | Ex: A startup issuing bonds faces high default risk — investors demand yields of 12–15% versus 5% for a blue-chip corporation. |
| Duration noun |
A measure of a bond's price sensitivity to interest rate changes — expressed in years. Higher duration = greater price volatility when rates change. | Ex: A bond with duration of 7 years will fall approximately 7% in price if interest rates rise by 1% — a key risk management tool. |
| F | ||
| Face Value (Par Value) noun |
The stated value of a bond — typically $1,000 — that the issuer repays at maturity. Also the basis for calculating coupon payments. | Ex: A bond with $1,000 face value trading at $950 is trading at a discount — investors will receive $1,000 at maturity regardless. |
| I | ||
| Interest Rate Risk noun |
The risk that rising interest rates will cause an existing bond's market price to fall. Longer-duration bonds have greater interest rate risk. | Ex: If rates rise from 5% to 7%, a 20-year bond will fall much more in price than a 1-year bond — due to higher interest rate risk. |
| J | ||
| Junk Bond (High-Yield Bond) noun |
A bond rated below investment grade (below BBB-/Baa3) — higher default risk, compensated by higher yields. Also called a high-yield bond. | Ex: Michael Milken pioneered junk bonds in the 1980s — financing high-risk companies with high-yield bonds that paid investors 12–15%. |
| P | ||
| Premium Bond noun |
A bond trading above its face (par) value — occurs when the coupon rate exceeds the current market yield. | Ex: If market rates fall to 4% but a bond pays a 7% coupon, it trades at a premium — investors pay more than $1,000 for the above-market income. |
| Y | ||
| Yield to Maturity (YTM) noun |
The total annualized return earned by an investor who buys the bond at the current price and holds it to maturity — the bond's IRR. The most complete measure of bond return. | Ex: A $1,000 bond with a 5% coupon trading at $950 has a YTM above 5% — investors earn the coupon PLUS the gain from $950 to $1,000 at maturity. |
| Z | ||
| Zero-Coupon Bond noun |
A bond that pays no periodic coupon — issued at a deep discount to face value and redeemed at face value at maturity. All return is in the form of price appreciation. | Ex: A zero-coupon bond with $1,000 face value maturing in 10 years sells today at $463 (at 8% yield) — no payments until maturity. |
| Asset Class | Avg Annual Return | Std Deviation | Risk Level |
|---|---|---|---|
| U.S. T-Bills (3-month) | ~3.4% | ~3.1% | Very Low |
| U.S. Treasury Bonds | ~5.0% | ~8.0% | Low |
| Corporate Bonds (AAA) | ~5.8% | ~8.5% | Low-Moderate |
| Large-Cap Stocks (S&P 500) | ~10.5% | ~15.6% | Moderate-High |
| Small-Cap Stocks | ~12.5% | ~20%+ | High |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| A | ||
| Alpha noun |
The excess return of an investment above what would be predicted by its beta (market risk). A positive alpha means the asset outperformed its risk-adjusted benchmark. | Ex: A mutual fund with a beta of 1.0 that returned 14% when the market returned 10% has an alpha of 4% — it outperformed on a risk-adjusted basis. |
| B | ||
| Beta (β) noun |
A measure of a stock's volatility relative to the overall market. β=1.0 moves with the market; β>1.0 is more volatile; β<1.0 is less volatile. | Ex: A tech stock with β=1.5 rises 15% when the market rises 10% — and falls 15% when the market falls 10%. |
| C | ||
| CAPM (Capital Asset Pricing Model) noun |
A model relating expected return to systematic risk: E(r) = r_f + β × (r_m − r_f). The most widely used framework for pricing risky assets. | Ex: With r_f=4%, β=1.2, and market premium of 6%, CAPM gives required return = 4% + 1.2 × 6% = 11.2%. |
| Coefficient of Variation (CV) noun |
Standard Deviation ÷ Expected Return. A risk-per-unit-of-return measure that allows comparison of assets with different expected returns. | Ex: Stock A with 20% standard deviation and 15% expected return has CV = 1.33. Stock B with 15% SD and 12% return has CV = 1.25 — B is less risky per unit of return. |
| Correlation Coefficient (ρ) noun |
A measure of how two assets move together, ranging from −1.0 (perfect negative correlation) to +1.0 (perfect positive correlation). The key to diversification. | Ex: Two stocks with ρ=−0.8 move in opposite directions — combining them in a portfolio dramatically reduces overall risk. |
| D | ||
| Diversification noun |
The process of spreading investments across multiple assets to reduce unsystematic (firm-specific) risk. Does NOT eliminate systematic (market) risk. | Ex: Owning stock in both a bakery and an umbrella maker diversifies weather risk — when it rains, umbrella sales rise as bakery foot traffic falls. |
| E | ||
| Expected Return noun |
The probability-weighted average of all possible returns on an investment. The anticipated return before uncertainty resolves. | Ex: If a stock returns 20% (prob 30%), 10% (prob 50%), and -5% (prob 20%), expected return = 0.30×20 + 0.50×10 + 0.20×(−5) = 10%. |
| M | ||
| Market Risk Premium noun |
The excess return of the overall market above the risk-free rate: r_m − r_f. Compensation investors demand for bearing market-level systematic risk. | Ex: If the market returns 10% and T-bills return 4%, the market risk premium is 6% — the reward for investing in stocks over 'safe' assets. |
| P | ||
| Portfolio noun |
A collection of investments (stocks, bonds, real estate, etc.) held by an investor. Portfolio theory shows that diversification reduces total risk below the average of the individual assets' risks. | Ex: A BBYM community investment portfolio might include stocks, bonds, real estate in Bessemer, and CDFI loans — diversified across asset classes. |
| R | ||
| Required Rate of Return noun |
The minimum return an investor must receive to invest in an asset, given its risk. Equals the risk-free rate plus a risk premium commensurate with the asset's systematic risk. | Ex: Using CAPM with β=1.3, an investor requires a return of 4% + 1.3×6% = 11.8% before investing in a stock. |
| Risk noun |
The chance that actual returns will differ from expected returns. In finance: measured by the standard deviation (total risk) or beta (systematic risk) of returns. | Ex: Investing in a startup has high risk — actual returns could be far above OR far below what was expected. |
| Risk-Free Rate (r_f) noun |
The return on a riskless investment — typically the yield on short-term U.S. Treasury bills. The baseline return for zero risk. | Ex: If 3-month T-bills yield 4.5%, r_f = 4.5% — any riskier investment must offer a return above 4.5% to attract rational investors. |
| S | ||
| Security Market Line (SML) noun |
A graphical representation of CAPM — plotting required return (y-axis) against beta (x-axis). All fairly priced assets lie ON the SML. | Ex: An asset plotting ABOVE the SML is underpriced (offers more return than required for its risk); one BELOW is overpriced. |
| Standard Deviation (σ) noun |
A statistical measure of the dispersion of returns around the mean — the most common measure of a single asset's total risk. | Ex: A stock with expected return 10% and standard deviation 25% typically returns between −15% and 35% in any given year (within one standard deviation). |
| Systematic Risk (Market Risk) noun |
Risk that affects the entire market and cannot be eliminated through diversification — recessions, interest rate changes, inflation. Measured by beta. | Ex: The COVID-19 pandemic caused systematic risk — nearly every stock fell simultaneously, making diversification ineffective at preventing losses. |
| U | ||
| Unsystematic Risk (Firm-Specific Risk) noun |
Risk unique to a single company or industry — a product recall, management scandal, or factory fire. CAN be eliminated through diversification. | Ex: A BBYM bakery that burns down faces unsystematic risk — investors holding a diversified portfolio are unaffected by this single event. |
| Valuation Method | Formula | Best Used For |
|---|---|---|
| Gordon Growth Model | D₁ / (rs − g) | Stable dividend-paying firms |
| P/E Multiple | EPS × Industry P/E | Earnings-based firms |
| P/B Multiple | Book Value × P/B ratio | Banks, asset-heavy firms |
| Discounted Cash Flow | PV of future FCF | Any firm with projectable cash flows |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| C | ||
| Common Stock noun |
An equity security representing ownership in a corporation. Common stockholders are residual claimants — last to be paid, but with unlimited upside. They vote on major decisions. | Ex: Buying Apple common stock makes you a partial owner — entitled to dividends (if paid) and a share of the firm's future earnings growth. |
| Constant Growth Model (Gordon Growth Model) noun |
Stock Price = D₁ ÷ (r − g). Values a stock as the PV of dividends growing at a constant rate forever. Requires r > g. | Ex: A stock paying a $2 dividend next year, growing at 4% forever, discounted at 10%: P₀ = $2 ÷ (0.10 − 0.04) = $33.33. |
| D | ||
| Dividend noun |
A cash payment made by a corporation to its shareholders from current or retained earnings — a distribution of profits. | Ex: A BBYM enterprise paying $0.50 per share per quarter distributes $2.00 annually in dividends to each shareholder. |
| Dividend Discount Model (DDM) noun |
Stock valuation approach: intrinsic value = present value of all expected future dividends. The foundation of equity valuation theory. | Ex: Using DDM, a stock paying constant $3/year dividends forever at a 9% discount rate is worth $3 ÷ 0.09 = $33.33 per share. |
| Dividend Yield noun |
Annual Dividends per Share ÷ Market Price per Share. The income return from dividends alone — excluding capital gains. | Ex: A stock paying $2/year in dividends and trading at $40 has a dividend yield of 5% — the income component of total return. |
| E | ||
| Earnings per Share (EPS) noun |
Net Income ÷ Shares Outstanding. The portion of a company's profit allocated to each share of common stock. | Ex: A firm with Net Income of $500,000 and 100,000 shares outstanding has EPS of $5.00 per share. |
| Efficient Market Hypothesis (EMH) noun |
The theory that market prices fully reflect all available information, making it impossible to consistently 'beat the market' through analysis. | Ex: The strong-form EMH implies that even insider information is already reflected in prices — an argument against insider trading profitability. |
| G | ||
| Growth Stock noun |
A stock of a company expected to grow faster than average — typically reinvests earnings rather than paying dividends, trading at a high P/E ratio. | Ex: Amazon traded at very high P/E ratios for years because investors expected explosive growth — earnings were reinvested, not paid as dividends. |
| M | ||
| Market Capitalization noun |
The total market value of a company's outstanding shares: Share Price × Shares Outstanding. The market's estimate of the firm's total equity value. | Ex: A company with 10 million shares trading at $50 has market capitalization of $500 million. |
| N | ||
| Non-constant Growth Model noun |
A stock valuation approach that allows for different dividend growth rates in different periods — typically high growth early, then constant growth later. | Ex: A tech startup expected to grow dividends at 20% for 5 years then 4% forever requires the non-constant growth model to value correctly. |
| P | ||
| P/E Ratio (Price-to-Earnings) noun |
Market Price per Share ÷ EPS. Measures how much investors pay per dollar of earnings. High P/E = high growth expectations or overvaluation. | Ex: A stock at $50 with EPS of $5 has P/E of 10× — investors pay $10 for each dollar of annual earnings. |
| Preferred Stock noun |
A hybrid security with features of both debt and equity — pays a fixed dividend (like bond interest) and has priority over common stock in bankruptcy, but no voting rights. | Ex: A BBYM investor holding preferred stock receives $4/share annually before common shareholders receive any dividend. |
| S | ||
| Stock Repurchase (Buyback) noun |
When a company buys back its own shares in the open market — reducing shares outstanding, potentially increasing EPS and share price. | Ex: Apple spent $90 billion repurchasing stock in 2023 — reducing shares outstanding and boosting EPS for remaining shareholders. |
| T | ||
| Terminal Value noun |
The estimated value of all cash flows beyond a forecast period — calculated using the constant growth model and then discounted to present value. | Ex: In a DCF model forecasting 5 years of cash flows, the terminal value captures the value of all cash flows from Year 6 onward. |
| Total Return noun |
The complete investment return: dividend yield plus capital gain (or loss). Total Return = (Ending Price − Beginning Price + Dividends) ÷ Beginning Price. | Ex: Buying a stock at $40, receiving $2 in dividends, and selling at $48 yields total return = ($48 − $40 + $2) ÷ $40 = 25%. |
| Capital Source | Typical Cost Range | Tax Deductible? |
|---|---|---|
| Short-term debt | 5–8% | Yes |
| Long-term bonds | 5–9% | Yes |
| Preferred stock | 6–10% | No |
| Common equity (retained) | 9–15% | No |
| New common stock | 10–18% | No |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| A | ||
| After-Tax Cost of Debt (r_d(1−T)) noun |
The effective cost of debt after accounting for the tax deductibility of interest. Since interest is tax-deductible, the true cost to the firm is reduced. | Ex: With a 8% interest rate and 25% tax rate, after-tax cost of debt = 8% × (1 − 0.25) = 6% — the government subsidizes the interest cost. |
| C | ||
| Capital Component noun |
Each distinct source of financing in a firm's capital structure — primarily debt, preferred stock, and common equity. Each has its own required return (cost). | Ex: A firm financed 40% by debt, 10% by preferred stock, and 50% by common equity has three capital components, each with its own cost. |
| Cost of Common Equity (r_s) noun |
The required return on common stock — estimated using CAPM (r_s = r_f + β×MRP) or the Dividend Growth Model (r_s = D₁/P₀ + g). | Ex: Using CAPM with r_f=4%, β=1.2, MRP=6%: cost of common equity = 4% + 1.2×6% = 11.2%. |
| Cost of New Common Equity (r_e) noun |
The cost of raising NEW equity by issuing new shares — higher than retained earnings cost because of flotation costs paid to investment banks. | Ex: If issuing new shares incurs 5% flotation costs, r_e = D₁ ÷ [P₀×(1−F)] + g, which is higher than r_s using retained earnings. |
| Cost of Preferred Stock (r_ps) noun |
The required return on preferred stock: Annual Preferred Dividend ÷ Net Price. No tax adjustment because preferred dividends are not tax-deductible. | Ex: Preferred stock paying a $5 annual dividend and issued at $50 per share has cost of preferred = $5 ÷ $50 = 10%. |
| Cost of Retained Earnings (r_s) noun |
The opportunity cost of using retained earnings — what shareholders could earn elsewhere at the same risk level. Estimated via CAPM or dividend growth model. | Ex: If shareholders can earn 11% on comparable-risk investments, the opportunity cost of retaining earnings is 11% — that's r_s. |
| F | ||
| Flotation Cost noun |
The cost of issuing new securities — underwriting fees, legal fees, and administrative costs paid to investment banks. Increases the effective cost of new capital. | Ex: If a firm raises $10 million in new stock but pays $500,000 in flotation costs, it nets only $9.5 million — the 5% flotation cost raises the effective equity cost. |
| H | ||
| Hurdle Rate noun |
The minimum required return a project must meet or exceed to be accepted — typically equal to the firm's WACC for average-risk projects. | Ex: A firm with WACC of 10% will reject any project with expected IRR below 10% — the WACC serves as the hurdle rate. |
| M | ||
| Marginal Cost of Capital (MCC) noun |
The cost of obtaining one additional dollar of new capital — rises as a firm raises more capital in a given period due to increasing flotation costs and risk. | Ex: After exhausting low-cost retained earnings, a firm must issue new stock at higher cost — the MCC schedule rises as more capital is raised. |
| O | ||
| Optimal Capital Budget noun |
The total amount of capital investment a firm should make — where the marginal cost of capital equals the return on the best available investment project. | Ex: A firm's optimal capital budget is reached when the last dollar invested earns exactly the firm's marginal cost of that dollar. |
| T | ||
| Target Capital Structure noun |
The firm's desired long-run mix of debt, preferred stock, and equity — the weights used in calculating WACC. | Ex: A firm targeting 40% debt, 60% equity uses those weights in WACC regardless of its current actual financing mix. |
| W | ||
| WACC (Weighted Average Cost of Capital) noun |
The blended cost of all capital sources, weighted by their proportion in the capital structure: WACC = w_d×r_d(1−T) + w_ps×r_ps + w_s×r_s. | Ex: With 40% debt at 6% after-tax, 10% preferred at 9%, and 50% equity at 11%: WACC = 0.4×6% + 0.1×9% + 0.5×11% = 8.8%. |
| Weight of Debt (w_d) noun |
The proportion of total capital funded by debt — used as the debt weighting in WACC. Based on target capital structure (market values). | Ex: A firm with $40M in debt and $60M in equity (at market value) has w_d = $40M ÷ $100M = 40%. |
| Weight of Equity (w_s) noun |
The proportion of total capital funded by common equity — used as the equity weighting in WACC. Typically the largest component. | Ex: The same firm has w_s = $60M ÷ $100M = 60% — equity comprises 60% of the total capital funding the firm's assets. |
| Method | Decision Rule | Strength | Weakness |
|---|---|---|---|
| NPV | Accept if NPV > 0 | Best for value creation | Requires accurate rate |
| IRR | Accept if IRR ≥ WACC | Intuitive % | Multiple IRR problem |
| MIRR | Accept if MIRR ≥ WACC | Fixes IRR issues | Less familiar |
| Payback | Accept if Payback ≤ target | Simple, quick | Ignores TVM |
| PI | Accept if PI ≥ 1.0 | Good for ranking | Scale problems |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| C | ||
| Cannibalization noun |
The reduction in sales of an existing product caused by introducing a new one. A relevant cost in capital budgeting that reduces the new project's incremental cash flows. | Ex: A BBYM bakery launching online delivery might cannibalize 10% of in-store sales — this lost revenue is a relevant cash flow cost of the project. |
| Capital Rationing noun |
A situation where a firm has more acceptable projects (positive NPV) than it can fund — it must select the best combination within a limited budget. | Ex: A BBYM enterprise with $50,000 to invest must choose among three positive-NPV projects — it cannot fund all three, so it must ration capital. |
| Crossover Rate noun |
The discount rate at which two projects have equal NPVs. Below the crossover rate, one project is preferred; above it, the other is preferred. | Ex: Projects A and B have equal NPV at a 10% discount rate — if the firm's WACC is below 10%, choose A; if above 10%, choose B. |
| D | ||
| Depreciation Tax Shield noun |
The annual tax savings from the depreciation deduction on a capital project: Depreciation × Tax Rate. A real cash inflow that improves project NPV. | Ex: A $50,000 machine depreciated over 10 years at a 25% tax rate generates $5,000 × 25% = $1,250 in annual tax shield cash flows. |
| I | ||
| Incremental Cash Flow noun |
The change in the firm's total cash flow directly attributable to a new project. Only incremental flows are relevant in capital budgeting analysis. | Ex: If a new product increases total revenues by $100,000 but also increases costs by $40,000, the incremental cash flow is $60,000 — not $100,000. |
| Independent Projects noun |
Capital projects where the accept/reject decision for one does not affect the decision for others. All projects with positive NPV should be accepted (if capital is unlimited). | Ex: A BBYM enterprise evaluating a new oven AND a delivery van independently — accepting one doesn't prevent accepting the other. |
| Internal Rate of Return (IRR) noun |
The discount rate that makes a project's NPV equal to zero — the project's own rate of return. Accept if IRR > WACC (hurdle rate). | Ex: A project costing $100,000 and generating $30,000/year for 5 years has an IRR of approximately 15.2% — accept if WACC < 15.2%. |
| M | ||
| MIRR (Modified IRR) noun |
A variation of IRR that reinvests cash inflows at the WACC (not at the IRR) — resolving multiple IRR problems and providing a more realistic return estimate. | Ex: A project with IRR of 25% may have MIRR of 18% if intermediate cash flows are realistically reinvested at the firm's 10% WACC. |
| Mutually Exclusive Projects noun |
Capital projects where accepting one automatically excludes the others — the firm can only choose one. Use NPV to decide, as IRR can mislead. | Ex: Choosing between a gas station or a community garden on the same land is mutually exclusive — only one can be built. |
| N | ||
| Net Present Value (NPV) noun |
The sum of the present values of all project cash flows (inflows and outflows) discounted at the WACC. The gold standard: accept if NPV > 0. | Ex: A project costing $100,000 that generates PV of future cash flows of $125,000 has NPV = $25,000 — it creates $25,000 of value. |
| NPV Profile noun |
A graph plotting a project's NPV (y-axis) against different discount rates (x-axis). Where the line crosses the x-axis equals the IRR. | Ex: An NPV profile shows that Project A has NPV = $20,000 at WACC=10% but NPV = -$5,000 at WACC=15% — the x-intercept is the IRR. |
| P | ||
| Payback Period noun |
The number of years required to recover the initial investment from the project's cash inflows. Simple, but ignores TVM and cash flows beyond payback. | Ex: A $100,000 project generating $25,000/year has a payback period of 4 years — but ignores whether Year 5+ cash flows are $0 or $1,000,000. |
| Post-Audit noun |
A review comparing a project's actual outcomes to its forecasted cash flows after completion. Improves future capital budgeting decisions and accountability. | Ex: After opening a new BBYM community center, a post-audit compares actual attendance, revenue, and costs to the original NPV projections. |
| S | ||
| Sunk Cost noun |
A cost already incurred that cannot be recovered — NEVER included in capital budgeting analysis because it doesn't change with the accept/reject decision. | Ex: Money already spent on market research is a sunk cost — it shouldn't influence whether to proceed with the project; only future incremental flows matter. |
| T | ||
| Terminal Cash Flow noun |
The final cash flow at the end of a project's life — including salvage value of assets, net of taxes, plus recovery of Net Working Capital. | Ex: When a machine is sold for $10,000 at end of Year 5 and NWC of $8,000 is recovered, terminal cash flow = $18,000 (before tax adjustments on salvage). |
| Leverage Type | Definition | Measured By | Effect |
|---|---|---|---|
| Operating | Fixed operating costs as % | DOL | Magnifies EBIT changes |
| Financial | Fixed financial charges (debt) | DFL | Magnifies EPS changes |
| Combined / Total | Both operating and financial | DTL = DOL × DFL | Magnifies EPS from sales |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| B | ||
| Business Risk noun |
The risk inherent in a firm's operations — variability in EBIT due to industry conditions, competition, and revenue volatility — independent of financing choices. | Ex: A BBYM enterprise selling luxury catering faces high business risk because demand drops sharply in recessions, making EBIT volatile. |
| D | ||
| Debt Overhang noun |
When a firm's existing debt is so large that it discourages new equity investment — new investors fear their returns will be captured by existing creditors. | Ex: A heavily indebted BBYM enterprise may struggle to attract new investment because creditors would absorb most of any gains from a successful project. |
| Degree of Financial Leverage (DFL) noun |
The percentage change in EPS for a 1% change in EBIT. Measures how debt amplifies income variability for shareholders. | Ex: A firm with DFL of 2.0 sees EPS rise 20% when EBIT rises 10% — and EPS fall 20% when EBIT falls 10%. |
| Degree of Operating Leverage (DOL) noun |
The percentage change in EBIT for a 1% change in sales. Measures sensitivity of operating income to revenue — driven by fixed vs. variable cost mix. | Ex: A firm with DOL of 3.0 sees EBIT rise 30% when sales rise 10% — and EBIT plunge 30% when sales fall 10%. |
| Degree of Total Leverage (DTL) noun |
DOL × DFL. The combined effect of operating and financial leverage — the percentage change in EPS for a 1% change in sales. | Ex: With DOL of 3.0 and DFL of 2.0, DTL = 6.0 — a 10% sales increase boosts EPS 60%, but a 10% decline crushes EPS 60%. |
| F | ||
| Financial Leverage noun |
The use of debt (fixed-cost financing) to amplify returns to equity shareholders. Increases both potential returns and potential losses. | Ex: A BBYM enterprise that borrows $50,000 to buy equipment generating high returns is using financial leverage to amplify shareholder gains. |
| Financial Risk noun |
The additional risk borne by shareholders because of the firm's use of debt financing — the risk that EBIT won't cover fixed interest obligations. | Ex: A firm with high debt faces financial risk — if sales fall, it still owes interest payments, which can force default even if the business is viable. |
| H | ||
| Hamada Equation noun |
Relates a firm's levered beta to its unlevered (asset) beta: β_L = β_U × [1 + (1−T) × (D/E)]. Used to estimate the cost of equity at different capital structures. | Ex: Unlevering a firm's beta removes the effect of its financing choices — revealing the business risk alone, useful for comparing across firms. |
| M | ||
| M&M Theorem (Modigliani-Miller) noun |
Under perfect market conditions (no taxes, no bankruptcy costs), capital structure is irrelevant — firm value is unaffected by the debt/equity mix. | Ex: M&M shows that without taxes or distress costs, issuing $1 of debt and retiring $1 of equity doesn't change the firm's total value. |
| M&M with Taxes noun |
When corporate taxes exist, debt creates a tax shield on interest — adding value. Optimal capital structure under M&M with taxes = 100% debt (impractical). | Ex: With a $1,000,000 debt and 25% tax rate, the PV of the interest tax shield adds approximately $250,000 of value to the firm. |
| O | ||
| Operating Leverage noun |
The extent to which a firm uses fixed operating costs versus variable costs. High fixed costs create high DOL — amplifying swings in EBIT with revenue changes. | Ex: A BBYM enterprise with a long-term lease (high fixed rent) has high operating leverage — small sales drops cause large EBIT drops. |
| Optimal Capital Structure noun |
The debt/equity mix that maximizes firm value by balancing the benefits of the tax shield with the costs of financial distress and agency conflicts. | Ex: A firm's optimal capital structure might be 35% debt — enough tax shield benefit without excessive distress and agency costs. |
| R | ||
| Recapitalization noun |
Changing the firm's capital structure by issuing one type of security and using proceeds to retire another — e.g., issuing debt to buy back equity. | Ex: A firm that borrows $10M and uses it to repurchase stock is recapitalizing — increasing leverage and potentially increasing the tax shield benefit. |
| T | ||
| Trade-off Theory noun |
The theory that optimal capital structure balances the tax benefits of debt against the costs of financial distress. Firms trade off these two forces. | Ex: Trade-off theory predicts firms use moderate debt — enough to capture tax shields without risking the distress costs that come with excessive leverage. |
| Key Date | Description |
|---|---|
| Declaration Date | Board announces the dividend |
| Ex-Dividend Date | Must own stock BEFORE this date to receive dividend |
| Record Date | Official date to determine eligible shareholders |
| Payment Date | Dividend is actually paid to shareholders |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| B | ||
| Bird-in-Hand Theory noun |
The argument that investors prefer dividends today over uncertain future capital gains — 'a bird in hand is worth two in the bush' — implying higher dividends raise firm value. | Ex: Investors who prefer guaranteed dividend income over uncertain price appreciation support the bird-in-hand rationale for paying dividends. |
| C | ||
| Clientele Effect noun |
The phenomenon where different investor groups (clienteles) prefer different dividend policies — high-income investors prefer low dividends to defer taxes; retirees prefer high dividends for income. | Ex: A firm that shifts from high to zero dividends will lose retiree shareholders who need income — replaced by growth investors who prefer reinvestment. |
| D | ||
| Declaration Date noun |
The date the board of directors formally announces the upcoming dividend — specifying the amount, record date, and payment date. | Ex: On the declaration date, the board states: '$0.50 per share dividend payable on March 15 to shareholders of record on March 1.' |
| Dividend noun |
A cash distribution paid by a corporation to shareholders from current or retained earnings — a return of profits to the owners of the firm. | Ex: A BBYM enterprise board votes to pay $1.00 per share in dividends, returning a portion of the year's profits to investors. |
| Dividend Irrelevance Theory noun |
Modigliani and Miller's argument that dividend policy doesn't affect firm value in perfect markets — investors can create homemade dividends by selling shares. | Ex: Under MM irrelevance, a firm paying $0 dividends and one paying $2 dividends are equally valuable — investors just sell shares to create their own 'dividend.' |
| Dividend Reinvestment Plan (DRIP) noun |
A program allowing shareholders to automatically reinvest dividends to purchase additional shares — often at no commission and sometimes at a discount. | Ex: A BBYM student investor enrolled in a DRIP automatically uses her quarterly dividends to buy more shares — compounding her ownership stake over time. |
| E | ||
| Ex-Dividend Date noun |
The first date on which a stock trades WITHOUT entitlement to the upcoming dividend. Buyers on or after this date do NOT receive the dividend; sellers retain it. | Ex: A stock goes ex-dividend on February 28 — investors who buy on February 28 or later will NOT receive the March 15 dividend payment. |
| H | ||
| Homemade Dividend noun |
When an investor creates their own 'dividend' by selling a portion of shares — the MM argument for why dividend policy is irrelevant under perfect market conditions. | Ex: A shareholder who wants $100 in income but the firm pays no dividends can sell $100 worth of shares to create a homemade dividend. |
| I | ||
| Information Content (Signaling) Effect noun |
The idea that dividend changes signal management's expectations about future earnings — increases signal confidence; cuts signal trouble. | Ex: When Microsoft raised its dividend 10%, the market interpreted it as a signal that management expected strong sustained future cash flows. |
| P | ||
| Payment Date noun |
The date the dividend check or electronic payment is actually sent to shareholders who were on record on the record date. | Ex: Shareholders on record as of March 1 receive their dividend payments on March 15 — the payment date. |
| Payout Ratio noun |
Dividends per Share ÷ Earnings per Share (EPS). The fraction of earnings distributed as dividends. 1 − Payout Ratio = Retention Ratio. | Ex: A company with EPS of $5 paying a $2 dividend has a payout ratio of 40% — retaining 60% of earnings for reinvestment. |
| R | ||
| Record Date noun |
The date the firm checks its shareholder register — shareholders 'of record' on this date receive the dividend. Two business days after the ex-dividend date. | Ex: To receive the March 15 dividend, an investor must be listed as a shareholder on the March 1 record date. |
| Residual Dividend Model noun |
A dividend policy where dividends are paid only from leftover earnings after all positive-NPV investment opportunities have been funded. | Ex: Under the residual model, if BBYM's enterprise has great investment opportunities, it pays no dividend — it reinvests everything to maximize long-run value. |
| S | ||
| Share Repurchase (Buyback) noun |
When a company buys back its own shares in the open market — an alternative to dividends for returning cash to shareholders, often tax-advantaged. | Ex: A firm repurchasing $100M of stock reduces shares outstanding, boosting EPS and potentially the share price — without a taxable dividend event. |
| Stock Dividend noun |
A dividend paid in the form of additional shares rather than cash — increases shares outstanding but reduces price per share proportionally; total value unchanged. | Ex: A 10% stock dividend on 1,000 shares means receiving 100 new shares — but if price was $50, it adjusts to approximately $45.45. |
| Stock Split noun |
A corporate action that increases shares outstanding by dividing existing shares — e.g., 2-for-1 split doubles shares and halves price. No change in total market cap. | Ex: Apple's 4-for-1 stock split in 2020 reduced the per-share price from ~$500 to ~$125, making shares more accessible to small investors. |
| Personal Finance Parallel | Business Term | Your Version |
|---|---|---|
| Emergency Fund | Cash Buffer / Liquidity Reserve | 3–6 months of expenses |
| Bills Due | Accounts Payable | Rent, utilities, subscriptions |
| Money Owed to You | Accounts Receivable | Freelance income, reimbursements |
| Supplies on Hand | Inventory | Prepaid goods & supplies |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| A | ||
| Accounts Payable Management noun |
The practice of timing payments to suppliers to maximize the use of trade credit without damaging supplier relationships or credit terms. | Ex: A BBYM enterprise that pays invoices on Day 28 (within a net-30 term) efficiently uses free trade credit while maintaining supplier goodwill. |
| Accruals noun |
Short-term liabilities representing earned but not yet paid obligations — wages payable, taxes payable. A spontaneous, interest-free source of financing. | Ex: A firm whose employees are paid every two weeks always has one week of earned but unpaid wages in accruals — free short-term financing. |
| C | ||
| Cash Budget noun |
A forecast of expected cash inflows and outflows over a planning period — used to identify future cash surpluses or shortfalls before they occur. | Ex: A BBYM catering enterprise builds a monthly cash budget to see that December is a surplus month but January will need a credit line draw. |
| Cash Conversion Cycle (CCC) noun |
Days Sales Outstanding + Days Inventory Outstanding − Days Payable Outstanding. Measures how many days cash is tied up in operations. Shorter is better. | Ex: CCC = 40 DSO + 30 DIO − 25 DPO = 45 days — the firm's cash is tied up for 45 days between paying for goods and collecting from customers. |
| Commercial Paper noun |
Unsecured, short-term promissory notes issued by large, creditworthy corporations to raise cash for 1–270 days. Lower rate than bank loans for top-rated borrowers. | Ex: Ford Motor issues commercial paper at 5.2% to fund its 90-day receivables — cheaper than a bank line of credit for a top-rated issuer. |
| D | ||
| Days Inventory Outstanding (DIO) noun |
Inventory ÷ (COGS ÷ 365). How many days on average inventory sits before being sold. Longer DIO = more cash tied up in inventory. | Ex: With inventory of $35,000 and daily COGS of $384, DIO = 91 days — the bakery holds inventory for 91 days on average before selling. |
| Days Payable Outstanding (DPO) noun |
Accounts Payable ÷ (COGS ÷ 365). How many days on average the firm takes to pay its suppliers. Longer DPO = more trade credit utilized. | Ex: With AP of $20,000 and daily COGS of $384, DPO = 52 days — the firm takes 52 days on average to pay suppliers. |
| Days Sales Outstanding (DSO) noun |
Accounts Receivable ÷ (Sales ÷ 365). How many days on average it takes to collect payment from customers. Also called Average Collection Period. | Ex: With AR of $35,000 and daily sales of $877, DSO = 40 days — customers take 40 days on average to pay their invoices. |
| L | ||
| Line of Credit noun |
A pre-approved short-term borrowing arrangement with a bank allowing the firm to draw funds up to a maximum limit as needed and repay flexibly. | Ex: A BBYM enterprise with a $50,000 line of credit can draw $20,000 in a slow month and repay when a large catering payment arrives. |
| Lock Box System noun |
An accounts receivable collection method where customers mail payments to a bank P.O. box — the bank processes them immediately, accelerating cash availability. | Ex: A Birmingham nonprofit uses a lockbox so donor checks are deposited the same day they arrive, reducing the collection float by 2–3 days. |
| N | ||
| Net Working Capital noun |
Current Assets minus Current Liabilities — the short-term liquidity buffer. Positive NWC means current assets exceed near-term obligations. | Ex: A BBYM enterprise with CA $90,000 and CL $45,000 has NWC of $45,000 — a healthy cushion to absorb cash flow timing gaps. |
| R | ||
| Revolving Credit Agreement noun |
A formal, committed line of credit — the bank legally commits to lending up to the limit for a specified period. More reliable than an informal line. | Ex: Unlike an informal line of credit that a bank can cancel, a revolving credit agreement guarantees the firm can borrow up to $100,000 for three years. |
| S | ||
| Short-Term Financing noun |
Borrowing with maturity of one year or less — used to fund temporary working capital needs. Includes bank loans, commercial paper, trade credit, and accruals. | Ex: A bakery using a $20,000 bank line of credit to fund holiday inventory build-up, repaid with January sales proceeds, is using short-term financing. |
| T | ||
| Trade Credit noun |
Credit extended by a supplier allowing the buyer to pay for goods after receiving them — typically expressed as 'net-30' or '2/10 net-30.' The most common source of short-term financing. | Ex: A '2/10 net-30' trade credit term means: pay within 10 days and get a 2% discount, or pay the full amount within 30 days. |
| Transaction Balance noun |
The cash a firm holds to cover day-to-day operational payments — payroll, supplier bills, utilities. The minimum cash needed to operate. | Ex: A BBYM enterprise keeps $5,000 in its checking account as a transaction balance — the minimum needed to cover weekly payroll and supplier payments. |
| Business Structure | Liability | Taxes | Best For |
|---|---|---|---|
| Sole Proprietorship | Unlimited personal | Pass-through (Schedule C) | Solo freelancers |
| LLC | Limited | Flexible (pass-through or corp) | Small businesses |
| S-Corporation | Limited | Pass-through (no double tax) | Growing small biz |
| C-Corporation | Limited | Corporate tax + dividend tax | Large / public companies |
| Cooperative | Limited | Pass-through | Community-owned ventures |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| A | ||
| Angel Investor noun |
A high-net-worth individual who invests personal capital in early-stage startups — typically in exchange for equity. Often also provides mentorship and connections. | Ex: A successful Birmingham entrepreneur who invests $50,000 in a BBYM graduate's catering startup in exchange for 15% equity is an angel investor. |
| B | ||
| Bootstrap Financing noun |
Funding a business from personal savings, revenue reinvestment, and resourcefulness — without external investors or traditional loans. | Ex: A BBYM student who starts a lawn care business using personal savings, reinvests every dollar of profit, and grows without borrowing is bootstrapping. |
| Break-Even Analysis noun |
Determines the level of sales at which total revenue equals total costs — the point where profit is zero. Critical for new ventures. | Ex: A BBYM bakery with $8,000 in monthly fixed costs and $3 contribution margin per unit must sell 2,667 units monthly to break even. |
| Business Plan noun |
A written document outlining a venture's mission, market opportunity, products/services, financial projections, and management team — required for most external financing. | Ex: A BBYM graduate seeking a CDFI loan must present a business plan showing 3-year financial projections, competitive analysis, and operational details. |
| C | ||
| Contribution Margin noun |
Revenue per unit minus Variable Cost per unit — the amount each sale contributes to covering fixed costs and generating profit. | Ex: A $10 cupcake with $4 in variable ingredient and packaging costs has a $6 contribution margin — each cupcake sold contributes $6 toward fixed costs. |
| Cooperative (Co-op) noun |
A business owned and democratically controlled by its members — who share profits, risks, and decision-making. A key vehicle for community wealth building. | Ex: A BBYM food cooperative owned by 50 community members shares grocery savings and year-end profits among all member-owners equally. |
| Crowdfunding noun |
Raising small amounts of capital from a large number of people — typically via online platforms. Types: rewards-based (Kickstarter), equity-based, or donation-based. | Ex: A BBYM student raises $15,000 from 300 community backers on a crowdfunding platform to launch a neighborhood bookstore. |
| F | ||
| Fixed Costs noun |
Costs that do not change with the level of output or sales — rent, insurance, salaries, equipment depreciation. Must be paid even if revenue is zero. | Ex: A BBYM enterprise's $8,000 monthly rent is a fixed cost — it's owed whether the bakery sells 100 or 10,000 cupcakes. |
| Franchise noun |
A business model where a franchisor licenses its brand, systems, and products to franchisees who operate their own locations and pay royalties. | Ex: A Birmingham resident who opens a Subway franchise licenses the brand and systems — paying Subway royalties while owning and operating her location. |
| L | ||
| LLC (Limited Liability Company) noun |
A business structure that provides owners (members) with limited personal liability while allowing flexible taxation as a sole proprietorship, partnership, or corporation. | Ex: A BBYM student forming an LLC for her tutoring business protects her personal assets — if the business is sued, creditors cannot take her car or savings. |
| M | ||
| Micro-Enterprise noun |
A very small business — often home-based or sole proprietor — with typically fewer than 5 employees and under $50,000 in annual revenue. The entry point for many BBYM entrepreneurs. | Ex: A BBYM student selling handmade jewelry at Birmingham markets for $8,000 per year is operating a micro-enterprise. |
| O | ||
| Operating Budget noun |
A projection of expected revenues and expenses over a period — typically one year — used to plan and manage a business's financial operations. | Ex: A BBYM enterprise's monthly operating budget shows projected catering revenue of $12,000 and expenses of $9,500 — a $2,500 monthly surplus target. |
| P | ||
| Proof of Concept noun |
Demonstrating, usually on a small scale, that a business idea is viable — that customers will pay and the business model works before large-scale investment. | Ex: A BBYM student selling at three farmers markets for six months is proving her concept before applying for a CDFI loan to open a permanent location. |
| S | ||
| Sole Proprietorship noun |
The simplest business structure — owned and operated by one person with no legal separation between the owner and the business. Unlimited personal liability. | Ex: A BBYM student who mows lawns and reports the income on her personal tax return is operating a sole proprietorship — the simplest structure. |
| V | ||
| Variable Costs noun |
Costs that change proportionally with the level of output or sales — raw materials, direct labor, packaging. Zero cost when output is zero. | Ex: Flour, sugar, and packaging for a bakery are variable costs — they rise with every additional batch of cupcakes produced. |
| Venture Capital (VC) noun |
Professional investment firms that provide substantial capital to high-growth startups in exchange for equity — typically entering after angel investment, targeting 10× returns. | Ex: A Birmingham tech startup that raises $2M from a venture capital firm in exchange for 25% equity is using VC financing to scale rapidly. |
| Account Type | Contribution Limit (2024) | Tax Treatment | Withdrawal (at 59½) |
|---|---|---|---|
| Traditional IRA | $7,000 ($8,000 if 50+) | Pre-tax (deductible) | Taxed as income |
| Roth IRA | $7,000 ($8,000 if 50+) | After-tax | Tax-FREE |
| 401(k) Traditional | $23,000 | Pre-tax | Taxed as income |
| 401(k) Roth | $23,000 | After-tax | Tax-FREE |
| HSA | $4,150 (individual) | Triple tax benefit | Tax-free for medical |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| A | ||
| Actuarial Risk noun |
Statistical risk calculated by insurance companies using probability and historical data to predict losses and set premiums — the science underlying insurance pricing. | Ex: An insurance company uses actuarial tables to determine that a 25-year-old non-smoker in Alabama faces a 0.1% annual mortality risk — setting life insurance premiums accordingly. |
| C | ||
| Coinsurance noun |
A cost-sharing arrangement where the insured pays a percentage of covered expenses after meeting the deductible — typically 20% after the deductible. | Ex: With 80/20 coinsurance, after a $1,000 deductible, the insurer pays 80% of a $5,000 bill — the insured pays $1,000 deductible + $1,000 (20%) = $2,000 total. |
| Copayment (Copay) noun |
A fixed amount paid by the insured for a specific service — a flat fee per doctor visit, prescription, or specialist visit. | Ex: A health plan with a $30 copay means the insured pays $30 for each primary care visit regardless of the total cost of the visit. |
| D | ||
| Deductible noun |
The amount the insured must pay out-of-pocket before insurance coverage begins. Higher deductible = lower premium, but more out-of-pocket risk. | Ex: A health plan with a $2,000 deductible means the insured pays the first $2,000 of annual medical expenses before insurance kicks in. |
| Diversification (Risk) noun |
Spreading risk across multiple assets, business activities, or insurance pools so that no single event causes catastrophic total loss. | Ex: A BBYM community investment fund diversified across stocks, bonds, real estate, and CDFI loans reduces the impact of any single asset's poor performance. |
| E | ||
| Emergency Fund noun |
Liquid savings equal to 3–6 months of living expenses — the personal finance foundation for managing uninsured risks and income interruption. | Ex: A BBYM graduate with $2,000/month in expenses should maintain a $6,000–$12,000 emergency fund in a high-yield savings account before investing. |
| F | ||
| Financial Plan noun |
A comprehensive strategy for managing income, expenses, savings, investments, insurance, and retirement — coordinated to achieve personal or organizational financial goals. | Ex: A BBYM student's financial plan includes a budget, student loan repayment schedule, Roth IRA contributions, and a target emergency fund — all coordinated. |
| H | ||
| Hedging noun |
Using a financial instrument (typically a derivative) to offset the risk of an adverse price movement in an asset. Reduces risk at the cost of limiting upside. | Ex: A BBYM enterprise that sells primarily in summer hedges revenue risk by locking in catering contracts in spring at fixed prices. |
| I | ||
| Insurance noun |
A risk management tool where the insured pays premiums to an insurer who agrees to compensate for specific losses. Transfers risk from individual to the insurance pool. | Ex: A BBYM entrepreneur buys business interruption insurance — if a fire closes her bakery, the insurer compensates for lost revenue during repairs. |
| L | ||
| Liability Insurance noun |
Insurance that protects against claims resulting from injuries, damage, or negligence caused by the insured's business operations or products. | Ex: A BBYM catering business carries $1M in liability insurance — if a guest is injured at an event, the insurer covers legal costs and damages. |
| O | ||
| Out-of-Pocket Maximum noun |
The most the insured will pay for covered services in a policy year — after this limit, the insurer pays 100% of covered costs. | Ex: A plan with a $6,000 out-of-pocket maximum guarantees the insured never pays more than $6,000 in covered medical expenses in one year. |
| P | ||
| Premium noun |
The regular payment made to an insurance company in exchange for coverage — monthly, quarterly, or annually. The price of risk transfer. | Ex: A BBYM student pays $180/month in health insurance premiums — the cost of transferring medical risk to the insurance company. |
| Property Insurance noun |
Insurance covering physical assets against damage or loss from fire, theft, weather, and other perils. Essential for business owners. | Ex: A Birmingham bakery buys property insurance covering its building, ovens, and equipment against fire, theft, and storm damage. |
| R | ||
| Retirement Planning noun |
The process of determining how much to save and invest to fund living expenses after leaving the workforce — using vehicles like 401(k), IRA, and Roth IRA. | Ex: A BBYM graduate who contributes 10% of each paycheck to a Roth IRA starting at 22 will have significantly more at retirement than one who starts at 32. |
| Risk Management noun |
The process of identifying, evaluating, and controlling financial risks through avoidance, reduction, transfer (insurance), or retention. | Ex: A BBYM enterprise identifies three key risks: fire, key employee departure, and revenue concentration — then buys insurance and cross-trains staff to manage them. |
| Roth IRA noun |
An individual retirement account funded with after-tax dollars — contributions can be withdrawn tax-free at any time; earnings grow and are withdrawn tax-free in retirement. | Ex: A BBYM student who contributes $6,000/year to a Roth IRA at 22 will have decades of tax-free compound growth by retirement. |
| Investment Type | Financial Return | Community Return | Risk Level |
|---|---|---|---|
| CDFI Bonds | 3–5% | High (local lending) | Low-Moderate |
| Impact ETFs | 6–10% | Medium (screened) | Moderate |
| Cooperative Shares | Variable | Very High (ownership) | Moderate |
| Community Land Trust | 2–4% | Very High (housing) | Low |
| Micro-Lending Platform | 4–8% | High (peer support) | Moderate |
| Term / Part of Speech | Definition | Example |
|---|---|---|
| B | ||
| B Corporation (Benefit Corporation) noun |
A for-profit company legally required to consider the interests of workers, community, and environment — not just shareholders. Certified by B Lab for meeting social/environmental standards. | Ex: Patagonia is a B Corporation — legally obligated to protect the environment alongside generating shareholder returns. |
| C | ||
| CDFI (Community Development Financial Institution) noun |
A Treasury-certified, mission-driven lender providing affordable financial services to underserved communities — loans, accounts, and counseling to build community wealth. | Ex: A Birmingham CDFI providing small business loans to minority entrepreneurs who can't access traditional bank financing is building community wealth directly. |
| Community Investment noun |
Directing financial resources — loans, equity, grants — into underserved communities to generate economic opportunity, jobs, and wealth for local residents. | Ex: The Swanson Initiative channels BBYM enterprise profits into community investments — funding youth business loans and cooperative ownership opportunities. |
| Community Land Trust (CLT) noun |
A nonprofit organization that holds land in trust for the permanent benefit of the community — providing permanently affordable housing by separating land ownership from building ownership. | Ex: A Birmingham CLT owns the land under homes so that residents own their houses but the land remains affordable for future generations. |
| Community Wealth noun |
Collective financial assets and ownership structures controlled by community members — cooperatives, CDFIs, community land trusts, and locally owned businesses that keep wealth circulating locally. | Ex: BBYM's mission is to build community wealth in Birmingham-Bessemer — ensuring that economic gains stay in the hands of local families and institutions. |
| Cooperative Finance noun |
Financial principles and practices used by cooperatives — member-owned, democratically governed organizations that distribute profits among members as patronage dividends. | Ex: A Bessemer food co-op uses cooperative finance: members receive patronage dividends based on their purchases — profit stays in the community. |
| E | ||
| ESG Investing noun |
Investment strategy incorporating Environmental, Social, and Governance factors alongside financial returns — seeking companies that create value while being responsible corporate citizens. | Ex: A BBYM investment committee using ESG criteria screens out companies with poor labor practices, regardless of their financial returns. |
| I | ||
| Impact Investing noun |
Investments made with the intention of generating measurable positive social or environmental impact alongside financial returns — not charity, not pure profit, but both. | Ex: A Birmingham investor who funds a CDFI mortgage program for first-generation homebuyers is impact investing — earning returns while building community wealth. |
| M | ||
| Microfinance noun |
Providing small loans, savings accounts, and financial services to low-income borrowers who lack access to traditional banking — pioneered by Muhammad Yunus and Grameen Bank. | Ex: A BBYM microfinance fund provides $500–$5,000 loans to student entrepreneurs who lack collateral but have strong business ideas and community ties. |
| Mission-Related Investment (MRI) noun |
Investments by nonprofit foundations that further their charitable mission — typically at below-market returns accepted in exchange for impact. | Ex: A BBYM foundation that invests $100,000 in a neighborhood housing fund at 3% (below market) in exchange for affordable housing impact is making an MRI. |
| P | ||
| Patronage Dividend noun |
A distribution of cooperative profits to members based on their level of participation (purchases or contributions) — not on shares owned. The cooperative's equivalent of a dividend. | Ex: Members of the Bessemer Food Co-op receive patronage dividends at year-end proportional to their annual grocery purchases — not based on capital invested. |
| Program-Related Investment (PRI) noun |
A loan or equity investment made by a charitable foundation to further its mission — counts toward the foundation's required charitable distribution and may carry below-market rates. | Ex: A BBYM foundation making a 1% loan to a local affordable housing developer is using a PRI — advancing its mission while recycling the capital for future impact. |
| S | ||
| Social Enterprise noun |
A business that applies commercial strategies to achieve social, environmental, or community goals — generating revenue while advancing a mission. | Ex: BBYM's youth-operated catering company is a social enterprise — it generates real revenue, trains young entrepreneurs, and reinvests profits in community programs. |
| Swanson Initiative proper noun |
BBYM's trust fund framework for building intergenerational community wealth through structured savings, youth enterprise profits, cooperative investment, and community grant-making. | Ex: The Swanson Initiative is the capstone application of 17 units of financial literacy — connecting every concept from cash flow to WACC to the goal of community wealth. |
| T | ||
| Triple Bottom Line noun |
A business accounting framework measuring performance across three dimensions: People (social impact), Planet (environmental impact), and Profit (financial return). | Ex: A BBYM enterprise reports its triple bottom line: $71,250 profit, 15 youth jobs created, and zero single-use plastics in operations — all three matter. |
| W | ||
| Wealth Extraction vs. Wealth Building noun |
The contrast between economic activity that transfers wealth out of a community (predatory lending, absentee ownership) versus activity that builds assets owned by community members. | Ex: A payday lender in Bessemer extracts wealth — charging 400% APR and sending profits to out-of-state owners. A CDFI builds wealth — keeping returns and ownership local. |
50 questions covering all 17 units — based on Brigham-Houston concepts and BBYM curriculum. Score 80% (40/50) or higher to pass!