Capital

Financial Terms related to Capital
This document is part of the valuable contents

available at www.ftpall.com, a free online
glossary with more than five thousand financial
and business terms.
This document can be copied and distributed freely
Find thousands of financial terms at www.ftpall.com

respecting its original format. It is forbidden its
transcription, translation or change on its format
without authorization of its author or editor.
CAPITAL
Average cost of capital
• A firm's required payout to the bondholders and to the stockholders expressed as a

percentage of capital contributed to the firm. Average cost of capital is computed by
dividing the total required cost of capital by the total amount of contributed capital.
Capital
• Cash or goods accumulated and available for use in producing more cash or
goods.
• The long-term funds of the firm; all items on the right-hand side of the firm's
balance sheet, excluding current liabilities.
• Money invested in a firm.
Capital account
• Net result of public and private international investment and lending activities.
www.ftpall.com 2|Page
Capital adequacy
• Banks have to maintain sufficient capital to be able to meet unforeseen

contingencies. The capital requirements involve minimum equity (Type I capital,
currently 4% of assets), or equity and long-term debt (Type II capital, currently 8% of
assets). The minimum capital requirements are stipulated by law.
Capital allocation decision
• Allocation of invested funds between risk-free assets versus the risky portfolio.

Capital appreciation
• A rise in the market price of an asset.
• The rise in the value of an investment s principal.
Capital asset
• see Fixed Assets
• All tangible property -- including securities, real estate, and other property -- held
for the long term.
• A fixed asset that is amortized; land; or financial asset (common shares, preferred
shares, and fixed income securities like bonds) held by a corporation.
Capital asset pricing model
• Abbreviated CAPM. The basic theory that links together risk and return for all
assets. The CAPM predicts a relationship between the required return, or cost of
common equity capital, and the nondiversifiable risk of the firm as measured by the
beta coefficient.
• Abbreviated CAPM. An economic theory that describes the relationship between

risk and expected return, and serves as a model for the pricing of risky securities.
The CAPM asserts that the only risk that is priced by rational investors is systematic
risk, because that risk cannot be eliminated by diversification. The CAPM says that
the expected return of a security or a portfolio is equal to the rate on a risk-free

security plus a risk premium.
• Is a tool that relates an asset's expected return to the market's expected return. It
combines the concepts of efficient capital markets with risk premiums. The idea of
capital market efficiency assumes immediate instantaneous -response to perfect or
near perfect information. The risk premiums relate an investment to the market's
risk-free or riskless rate of return. Typically, this risk-free rate is viewed in terms of
principal safety for short term U.S. government obligations. Here, beta relates the

volatility of an asset to the market.
Capital budget
• A firm's set of planned capital expenditures.
Capital budgeting
• The process of choosing the firm's long-term capital assets.
• The process of evaluating and selecting long-term investments (expected life of

greater than one year) that are consistent with the firm's goal of owner wealth
maximization.
• Consists of five distinct but interrelated steps proposal generation, review and
analysis, decision making, implementation, and follow-up.
Capital cost allowance
• Abbreviated CCA. The term for the amortization system that must be used for
income tax purposes when reporting to Canada Customs and Revenue Agency. It is
a non-cash expense that increases cash flow.
Capital expenditure
• Funds used by a company to acquire or upgrade physical assets such as property,

plants, or equipment.
• An outlay of funds by the firm that is expected to produce benefits over a period of
time greater than one year.
• Amount used during a particular period to acquire or improve long-term assets

such as property, plant or equipment.
• Expenditures for fixed assets
Capital flight
• The transfer of capital abroad in response to fears of political risk.

Capital gain
• An increase in the value of a capital asset such as common stock. If the asset is
sold, the gain is a realized capital gain. A capital gain may be short-term (if the
security is held one year or less) or long-term (if the security is held more than one
year).
• The positive difference between the selling price of a capital asset and the asset's
original cost plus the costs incurred to sell the asset.
• When a stock is sold for a profit, it's the difference between the net sales price of
securities and their net cost, or original basis. If a stock is sold below cost, the
difference is a capital loss.
Capital gains yield
• The price change portion of a stock's return.
Capital impairment rule
• The legal rule governing Canadian companies that prevents the payment of
dividends from the value of common shares on the balance sheet.
Capital lease
• A lease obligation that has to be capitalized on the balance sheet.

Capital loss
• The loss incurred when a capital asset, such as a security, is sold for a lower price
than the purchase price. See also: Capital Gain.
• The difference between the net cost of a security and the net sale price, if that
security is sold at a loss.
Capital market
• The market that trades long-term debt securities and common and preferred equity

securities.
• The market for trading long-term debt instruments (those that mature in more than
one year).
Capital market efficiency
• Reflects the relative amount of wealth wasted in making transactions. An efficient

capital market allows the transfer of assets with little wealth loss. See: efficient
market hypothesis.
Capital market imperfections view
• The view that issuing debt is generally valuable but that the firm's optimal choice of
capital structure is a dynamic process that involves the other views of capital
structure (net corporate/personal tax, agency cost, bankruptcy cost, and pecking
order), which result from considerations of asymmetric information, asymmetric
taxes, and transaction costs.
Capital market line
• Abbreviated CML. The line defined by every combination of the risk-free asset and
the market portfolio.
Capital rationing
• Placing one or more limits on the amount of new investment undertaken by a firm,
either by using a higher cost of capital, or by setting a maximum on parts of, and/or
the entirety of, the capital budget.
• The financial situation in which a firm has only a fixed number of dollars for
allocation among competing capital expenditures.
Capital stock
• Refers to all the common and preferred shares, if any, for a corporation.
• Ownership shares of a company, consisting of all common and preferred stock.

Capital structure
• The mix of long-term debt and equity maintained by the firm.
• The makeup of the liabilities and stockholders' equity side of the balance sheet,
especially the ratio of debt to equity and the mixture of short and long maturities.
• See Capitalization.
Capital surplus
• Amounts of directly contributed equity capital in excess of the par value.
• Refers to the accounting difference between the amounts received by the initial
sale of a corporation's stock less the par value of that stock. Since many new issues
are sold at prices in excess of the par value, the proceeds component can be
significant. Other related terms are Paid-In Capital or Paid-In Surplus.
Capitalization
• The debt and/or equity mix that fund a firm's assets.
• Also known as Invested Capital or Capital Structure. The sum of a corporation's

stock, long-term debt, and retained earnings.
Capitalization method
• A method of constructing a replicating portfolio in which the manager purchases a

number of the largest-capitalized names in the index stock in proportion to their

capitalization.
Capitalization rate
• See Discount Rate.
Capitalization ratios
• Show how a firm has financed the investment in assets. There are three
capitalization alternatives: debt, preferred equity and common equity.

• Also called financial leverage ratios, these ratios compare debt to total
capitalization and thus reflect the extent to which a corporation is trading on its
equity. Capitalization ratios can be interpreted only in the context of the stability of
industry and company earnings and cash flow.
Capitalization table
• A table showing the capitalization of a firm, which typically includes the amount of
capital obtained from each source -long-term debt and common equity -and the
respective capitalization ratios.
Capitalized
• Recorded in asset accounts and then depreciated or amortized, as is appropriate

for expenditures for items with useful lives greater than one year.
Capitalized interest
• Interest that is not immediately expensed, but rather is considered as an asset and
is then amortized through the income statement over time.
Capitalized lease
• A financial (capital) lease that has the present value of all its payments included as
an asset and corresponding liability on the firm's balance sheet, as required by
generally accepted accounting principles as set out in the CICA Handbook.
Change in net working capital
• The difference between the change in current assets and current liabilities
associated with an investment project.
Complete capital market
• A market in which there is a distinct marketable security for each and every
possible outcome.
Cost of capital

• The required return for a capital budgeting project.
• The minimum rate of return that a firm must earn on its project investments to
maintain its market value and attract needed funds. This rate of return is based on
the mix of debt and common equity financing.
• This is the price of capital. When corporations borrow, they pay interest, which is
called the cost of debt capital. In the context of valuing firms, the discount rate is
called the cost of capital.
Cost of limited partner capital
• The discount rate that equates the after-tax inflows with outflows for capital raised
from limited partners.
Debt capital
• All long-term borrowing incurred by the firm.
Debt to capital ratio
• The ratio of total debt to total capital ([short + long term debt] / capital). For long-
term investors, a suggested acceptable percentage is up to 33%. Debt must be
funded in good times and bad, so a company going through a bad slump has a
better chance of recovering if its debt load is not too high. Keep in mind that debt
serves the useful function of helping the company grow. It is up to management to
use it wisely and increase the sales and earnings.
Dedicated capital
• Total par value (number of shares issued, multiplied by the par value of each
share). Also called dedicated value.
Efficient capital market
• A market in which new information is very quickly reflected accurately in share

prices.

Equity capital
• The long-term funds provided by the firm's owners, the shareholders.
• see Owners' Equity
Exchange rate risk capital budgeting
• Danger that an unexpected change in the exchange rate between the dollar and
the currency in which the project's cash flows are denominated can reduce the
market value of that project's cash flow.
Financial or capital lease
• A longer-term lease than an operating lease that is noncancelable and obligates

the lessee to make payments for the use of an asset over a predefined period of
time; the total payments over the term of the lease are greater than the lessor's initial
cost of the leased asset.
Gigo garbage in, garbage out in capital budgeting
• If cash inflows are overestimated and/or the cost of capital underestimated, then
decisions that prove to be very costly for the firm and the shareholders can result;
poor forecasts can result in poor capital budgeting decisions.
Hard capital rationing

www.ftpall.com 10 | P a g e
• Capital rationing that under no circumstances can be violated.
Human capital
• The unique capabilities and expertise of individuals.
Invested capital
• See Capitalization.
Issued share capital
• Total amount of shares that are in issue. Related: outstanding shares.

Legal capital
• Value at which a company's shares are recorded in its books.
Leveraged recapitalization
• A takeover defense in which the target firm pays a large debt-financed cash
dividend, increasing the firm's financial leverage and deterring the takeover attempt.
Long term debt to capitalization
• A ratio that indicates a company's financial leverage. It is calculated by dividing

long term debt by the capital available to the company. The available capital is the
sum of long term debt, preferred stock and stocholders' equity.
Long term debt/capitalization
• Indicator of financial leverage. Shows long-term debt as a proportion of the capital

available. Determined by dividing long-term debt by the sum of long-term debt,
preferred stock and common stockholder equity.
Marginal cost of capital
• Abbreviated MMC. The firm's weighted average cost of capital (WACC) associated
with its next dollar of total new financing.
Marginal cost of capital schedule

• Graph that relates the firm's weighted average cost of capital (WACC) to the level
of total new financing.
Market cap or market capitalization
• Is a value placed on a company. It is computed by multiplying the number of

outstanding shares by the current share price.
Market capitalization
• The total dollar value of all outstanding shares. Computed as shares times current

market price. It is a measure of corporate size.
• The dollar valuation of the total number of shares times the current price. This
value is sometimes used by investors to classify stocks by size. It is not as reliable
as classifying by sales dollar value because the price of a stock can be inflated by
the market and not accurately representative of its size.
Market capitalization rate
• Expected return on a security. The market-consensus estimate of the appropriate

discount rate for a firm's cash flows.
Net working capital
• Current assets minus current liabilities. Often simply referred to as working capital.
• A measure of liquidity calculated as the difference between the firm's current

assets and its current liabilities, or, alternatively, the portion of current assets
financed with long-term funds; can be positive or negative.
• Net Working Capital refers to the net non-interest bearing short term assets:
Hence, net working capital equals cash plus inventories plus accounts receivables
minus accounts payables.
Net working capital recapture
• A positive cashflow benefit in a capital budgeting analysis that arises with the
termination of a project. At termination, sales associated with the project cease, and
the company will recover the originally invested net working capital.
Nondiversifiability of human capital
• The difficulty of diversifying one's human capital (the unique capabilities and
expertise of individuals) and employment effort.
Opportunity cost of capital
• Expected return that is foregone by investing in a project rather than in comparable

financial securities.
Optimal capital structure
• The capital structure at which the weighted average cost of capital is minimized,
thereby maximizing the firm's value.
Other capital
• In the balance of payments, other capital is a residual category that groups all the
capital transactions that have not been included in direct investment, portfolio
investment, and reserves categories. It is divided into long-term capital and short-
term capital and, because of its residual status, can differ from country to country.
Generally speaking, other long-term capital includes most non-negotiable
instruments of a year or more like bank loans and mortgages. Other short-term
capital includes financial assets of less than a year such as currency, deposits, and
bills.
Outstanding share capital
• Issued share capital less the par value of shares that are held in the company's
treasury.
Pecking order view of capital structure
• The argument that external financing transaction costs, especially those associated
with the problem of adverse selection, create a dynamic environment in which firms
have a preference, or pecking-order of preferred sources of financing, when all else
is equal. Internally generated funds are the most preferred, new debt is next, debt-
equity hybrids are next, and new equity is the least preferred source.
Perfect capital market
• A market in which there are never any arbitrage opportunities.
Perfect market view of capital structure

• Analysis of a firm's capital structure decision, which shows the irrelevance of
capital structure in a perfect capital market.
Personal tax view of capital structure
• The argument that the difference in personal tax rates between income from debt
and income from equity eliminates the disadvantage from the double taxation
(corporate and personal) of income from equity.
Pie model of capital structure
• A model of the debt/equity ratio of the firms, graphically depicted in slices of a pie
that represent the value of the firm in the capital markets.
Planned capital expenditure program
• Capital expenditure program as outlined in the corporate financial plan.
Pro forma capital structure analysis
• A method of analyzing the impact of alternative capital structure choices on a firm's

credit statistics and reported financial results, especially to determine whether the
firm will be able to use projected tax shield benefits fully.
Real capital
• Wealth that can be represented in financial terms, such as savings account

balances, financial securities, and real estate.
Real options capital budgeting
• Opportunities that are embedded in capital projects that enable managers to alter
their cash flows and risk in a way that affects project acceptability (NPV). Also called
strategic options.
Regulatory capital
• Is the amount of capital available for trading or position taking purposes by financial
institutions. The total capital base is adjusted for memberships, various fixed assets,
type and/or maturity of securities as well as other factors.

Risk capital budgeting
• The chance that the inputs into the analysis of an investment project will prove to
be wrong.
Soft capital rationing
• Capital rationing that under certain circumstances can be violated or even viewed
as made up of targets rather than absolute constraints.
Sophisticated approaches to capital budgeting
• Capital budgeting techniques that integrate time value procedures, risk and return
considerations, and valuation concepts to select capital projects that are consistent
with the firm's goal of maximizing owners' wealth.
Static theory of capital structure
• Theory that the firm's capital structure is determined by a trade-off of the value of
tax shields against the costs of bankruptcy.
Target capital structure
• The desired optimal mix of debt and equity financing that most firms attempt to
achieve and maintain.
Taxable capital gain

• The percentage of net capital gains (the difference between capital gains and
capital losses) that are included as taxable income, currently 50 percent.
Total capital
• Gives information about how the company is financed or capitalized. This can be a
combination of stock -- preferred and common shares -- and debt.
Uniform net capital rule
• Securities and Exchange Commission requirement that member firms as well as

nonmember broker-dealers in securities maintain a maximum ratio of indebtedness
to liquid capital of 15 to 1; also called net capital rule and net capital ratio.
Indebtedness covers all money owed to a firm, including margin loans and
commitments to purchase securities, one reason new public issues are spread
among members of underwriting syndicates. Liquid capital includes cash and assets
easily converted into cash.
Venture capital
• An investment in a start-up business that is perceived to have excellent growth

prospects but does not have access to capital markets. Type of financing sought by
early-stage companies seeking to grow rapidly.
Weighted average cost of capital
• Abbreviated WACC. Reflects the expected average future cost of funds for the
upcoming year; found by weighting the cost of each specific type of capital by its
proportion in the firm's capital structure.
• The average cost of all capital used by a firm. In the context of valuing firms, if the
capital is a mixture of debt and equity. The discount rate is called weighted average
cost of capital.
WACC = (1 - tc) * Rd * D/(D+E) + Re * E/ (D+E)
Where tc is the corporate tax rate , Rd is the contractual interest rate on (new) debt,
Re is the discount rate on equity, D and E are the market values of debt and equity
respectively. The return of all projects accepted by the corporation must exceed the
weighted average cost of capital (WACC) to create value for the shareholders.
• Expected return on a portfolio of all the firm's securities. Used as a hurdle rate for
capital investment.
Working capital
• Current assets, which represent the portion of investment that circulates from one
form to another in the ordinary conduct of business.

• Current assets minus current liabilities
• Also known as net working capital. It is calculated by subtracting current liabilities

from current assets. If a company's current assets do not exceed its current
liabilities, then it may be unable to meet its short-term liabilities with its current
assets (such as cash, accounts receivable, and inventory).
• Defined as the difference in current assets and current liabilities (excluding short-
term debt). Current assets may or may not include cash and cash equivalents,
depending on the company.
Working capital management
• The management of current assets and current liabilities to maximize short-term

liquidity.
Working capital ratio
• Working capital expressed as a percentage of sales.

Capital

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Capital

Transféré par

Droits d'auteur :

Formats disponibles

Financial Terms related to Capital

This document is part of the valuable contents

This document can be copied and distributed freely

Find thousands of financial terms at www.ftpall.com

• A firm's required payout to the bondholders and to the stockholders expressed as a

• Money invested in a firm.

• Banks have to maintain sufficient capital to be able to meet unforeseen

Capital allocation decision

Find thousands of financial terms at www.ftpall.com

• A rise in the market price of an asset.

• The rise in the value of an investment s principal.

• see Fixed Assets

Capital asset pricing model

• Abbreviated CAPM. An economic theory that describes the relationship between

the expected return of a security or a portfolio is equal to the rate on a risk-free

Find thousands of financial terms at www.ftpall.com

• A firm's set of planned capital expenditures.

• The process of choosing the firm's long-term capital assets.

• The process of evaluating and selecting long-term investments (expected life of

Capital cost allowance

• Funds used by a company to acquire or upgrade physical assets such as property,

• Amount used during a particular period to acquire or improve long-term assets

• Expenditures for fixed assets

• The transfer of capital abroad in response to fears of political risk.

Find thousands of financial terms at www.ftpall.com

Capital gains yield

• The price change portion of a stock's return.

Capital impairment rule

• A lease obligation that has to be capitalized on the balance sheet.

Find thousands of financial terms at www.ftpall.com

Capital market efficiency

• Reflects the relative amount of wealth wasted in making transactions. An efficient

Capital market imperfections view

Capital market line

• Ownership shares of a company, consisting of all common and preferred stock.

Find thousands of financial terms at www.ftpall.com

• The mix of long-term debt and equity maintained by the firm.

• Amounts of directly contributed equity capital in excess of the par value.

• The debt and/or equity mix that fund a firm's assets.

• Also known as Invested Capital or Capital Structure. The sum of a corporation's

• A method of constructing a replicating portfolio in which the manager purchases a

number of the largest-capitalized names in the index stock in proportion to their

• See Discount Rate.

Find thousands of financial terms at www.ftpall.com

• Recorded in asset accounts and then depreciated or amortized, as is appropriate

Change in net working capital

Complete capital market

Find thousands of financial terms at www.ftpall.com

Cost of limited partner capital

• All long-term borrowing incurred by the firm.

Debt to capital ratio

use it wisely and increase the sales and earnings.

Efficient capital market

• A market in which new information is very quickly reflected accurately in share

Find thousands of financial terms at www.ftpall.com

• The long-term funds provided by the firm's owners, the shareholders.

• see Owners' Equity

Exchange rate risk capital budgeting

Financial or capital lease

• A longer-term lease than an operating lease that is noncancelable and obligates

Gigo garbage in, garbage out in capital budgeting

Hard capital rationing

• Capital rationing that under no circumstances can be violated.

• The unique capabilities and expertise of individuals.