| Time Value of Money |
The principle that a pound today is worth more than a pound in the future. |
| Future Value (FV) |
The value of a current amount after earning a return over time. |
| Present Value (PV) |
The value today of a future amount, after discounting it at a given rate. |
| Discount Rate |
The rate used to convert a future cash flow into its present value. |
| Cost of Debt |
The interest rate a company pays on its borrowings, usually adjusted for tax. |
| Cost of Equity |
The return shareholders demand in exchange for the risk of their investment. |
| CAPM |
Capital Asset Pricing Model: estimates cost of equity as the risk-free rate plus beta times the equity risk premium. |
| Beta (β) |
A measure of how sensitive a company’s stock is to overall market movements. |
| Risk-Free Rate |
Typically the yield on long-term government bonds. |
| Equity Risk Premium |
The extra return required for investing in stocks instead of safe assets. |
| WACC |
Weighted Average Cost of Capital — the blended cost of debt and equity, weighted by each source’s share. |
| Financial Leverage |
The effect of using debt to magnify (or worsen) the return on equity. |
| Capital Structure |
The mix of debt and equity a company uses to finance itself. |
| Optimal Capital Structure |
The mix of debt and equity that achieves the lowest possible WACC. |
| Payback Period |
The time required to recover the initial investment from a project’s cash flows. |
| Profitability Index |
(NPV + Initial Investment) ÷ Initial Investment — measures return per pound invested. |
| XNPV / XIRR |
Versions of NPV and IRR that handle cash flows on irregular, actual dates. |
| Strategic Buyer |
An operating company acquiring another business to capture operating synergies. |
| Financial Buyer |
An investment fund (e.g. private equity) acquiring a business purely for financial return. |
| Enterprise Value (EV) |
The value of the entire operating business regardless of financing structure = Equity Value + Debt − Cash. |
| Equity Value |
What shareholders would receive if the company were sold (market cap for public companies). |
| Capital Stack |
The ranking of financing sources (senior debt, subordinated debt, equity) by repayment priority and risk. |
| Preferred Shares |
Shares with higher priority than common shares in liquidation and dividends. |
| Venture Capital (VC) |
Private financing for startups or early-growth-stage companies. |
| Leveraged Buyout (LBO) |
Acquiring a mature company using significant debt to maximize the return on equity. |
| Senior Debt |
The highest-priority, lowest-cost debt, including revolvers and term loans. |
| Subordinated Debt |
Debt that fills the funding gap between senior debt and equity, at higher risk and cost. |
| Credit Rating |
An assessment from agencies like Moody’s and S&P of debt repayment risk. |
| Dividend |
A cash payment distributed to shareholders from a company’s profits. |
| Share Buyback |
A company repurchasing its own shares from the market, reducing shares outstanding. |
| Ex-Dividend Date |
The first day a stock trades without the declared dividend attached. |