CA Final AFM key terms

A long-range plan linking a firm's financing, investment and dividend choices to its competitive goals, so that capital structure and fund-raising decisions support value creation rather than merely meeting immediate cash needs.

Management's deliberate choice of the mix of debt and equity used to fund the firm, balancing interest tax shields against financial distress costs and preserving financial flexibility for future investment.

Direct and indirect losses arising when a firm struggles to service debt, including legal and advisory fees, lost sales, supplier pressure and forced asset sales, which erode value as leverage rises.

The view that optimal leverage balances the tax benefit of debt interest against rising expected bankruptcy and agency costs, producing an interior target debt ratio rather than maximum borrowing.

A financing hierarchy stating that firms prefer internal funds first, then debt, and issue equity only as a last resort, because adverse selection makes outside equity the most expensive and most negatively interpreted source.

A situation where managers know more about firm prospects than outside investors, so financing choices and issue announcements signal private information and affect the price investors will pay.

Using a costly, observable action such as a dividend increase or debt issue to credibly convey private information about firm quality to investors who cannot verify it directly.

The rules governing how much profit is distributed to shareholders versus retained, including payout level, form and stability, which influence investor clienteles and interact with investment and financing decisions.

A payout method where dividends equal earnings left after funding all positive-net-present-value projects at the target capital structure, so payout fluctuates with investment opportunities.

The maximum loss a portfolio is expected to suffer over a stated horizon at a given confidence level, expressed in currency, assuming normal market conditions and a specified holding period.

The average loss conditional on losses exceeding the Value at Risk threshold, also called conditional VaR; it is a coherent risk measure because it captures tail severity rather than a single quantile.

Evaluating portfolio or firm losses under extreme but plausible scenarios, such as a sharp rate shock or currency collapse, to reveal vulnerabilities that statistical models calibrated on normal markets miss.

Estimating outcomes under several explicitly defined future states, each with assumed probabilities or none, to compare project or portfolio performance across alternative economic and market conditions.

Testing how a project's net present value or a position's value changes when one input is varied while others are held constant, identifying which assumptions most affect the decision.

The guaranteed amount a decision maker would accept in place of a risky expected cash flow, used to convert risky flows into risk-free equivalents before discounting at the risk-free rate.

A required return raised above the risk-free rate to compensate for a project's or security's systematic risk, used to discount expected cash flows to present value.

Valuable managerial flexibilities embedded in projects, such as the option to delay, expand, abandon or switch inputs, which standard discounted cash flow analysis ignores and which raise project value.

A constraint limiting total investment below the amount that positive-net-present-value projects would absorb, forcing ranking of projects by profitability index or similar measure.

The ratio of the present value of a project's cash inflows to its initial outlay; values above one indicate acceptance and the index ranks projects efficiently under capital rationing.

The sum of a project's expected cash flows discounted at the appropriate required return, less the initial investment; a positive value indicates the project adds shareholder wealth.

The minimum return a firm must earn on its investments to satisfy debt and equity providers, typically measured as the weighted average of after-tax debt and equity costs at target weights.

A measure of a security's sensitivity to movements in the market portfolio; it drives the capital asset pricing model's estimate of required return and separates systematic from diversifiable risk.

An equilibrium model stating that expected return equals the risk-free rate plus beta times the market risk premium, pricing only non-diversifiable risk and underpinning cost of equity estimates.

Market-wide risk from economy, interest rate and inflation factors that cannot be eliminated by diversification, and which the market therefore prices into expected returns.

A multi-factor return model where expected return depends linearly on several macroeconomic or style factors, allowing richer risk attribution than the single-factor capital asset pricing model.

Pooling illiquid receivables or loans and issuing marketable securities backed by their cash flows, often through a special purpose vehicle that isolates the assets from the originator's credit risk.

A bankruptcy-remote legal entity that purchases assets from an originator and issues securities against them, keeping the pooled cash flows separate from the originator's other obligations.

Techniques such as subordination, over-collateralisation, excess spread or guarantees that reduce the credit risk borne by senior securitisation investors and so improve the securities' ratings and pricing.

The market value of a mutual fund's assets minus its liabilities, divided by units outstanding, giving the per-unit price at which investors buy or redeem on a given valuation date.

A mutual fund that continuously issues and redeems units at net asset value on demand, keeping its unit count variable and its portfolio partly liquid to meet redemptions.

Total annual fund operating expenses, including management fees and administrative costs, expressed as a percentage of average net assets and deducted before returns reach investors.

The change in an option's price for a one-unit change in the underlying asset price; also interpreted as the equivalent underlying position or hedge ratio for a small price move.

The rate at which an option's delta changes as the underlying price moves, measuring the curvature of the payoff and the rebalancing frequency needed to keep a delta hedge neutral.

The change in an option's value per unit of time passing, usually negative for long option positions because time value decays as expiry approaches, all else equal.

The change in an option's price for a one percentage point change in implied volatility, showing how sensitive the position is to shifts in expected future price variability.

The condition that the forward exchange premium or discount between two currencies equals the interest rate differential, so that covered borrowing and investing in either currency yields the same return.

Borrowing in one currency, converting at spot, investing in the other currency and selling the proceeds forward to lock a riskless profit when interest rate parity does not hold.

The theory that exchange rates adjust so identical goods cost the same across countries, with relative versions linking expected exchange rate changes to inflation differentials over time.

A customised binding agreement to buy or sell a currency or asset at a fixed price on a future date, used to lock in exchange rates or yields and traded over the counter.

An agreement to exchange principal and interest payments in two currencies over a set period, used to obtain cheaper funding in a foreign currency or to hedge long-dated exposure.

The risk that exchange rate movements change the domestic currency value of already contracted foreign currency receivables, payables or borrowings before settlement.

Accounting risk that converting foreign subsidiaries' financial statements into the parent's reporting currency changes reported earnings or net worth when exchange rates move.

The longer-term risk that currency movements alter a firm's competitive position and the present value of future cash flows, even where no foreign currency contract yet exists.

A negotiable certificate issued by a depositary bank representing shares of a foreign company held on deposit, allowing US investors to trade and receive dividends in dollars.

A depositary receipt listed outside the issuer's home market, often in London or Luxembourg, enabling a firm to raise capital from international investors while trading in a familiar currency.

Acquiring or building productive assets abroad to exercise management control, undertaken for market access, cost advantages or resources and exposed to political and currency risk.

The combination of two companies into a single surviving entity, with shareholders of the acquired firm typically receiving cash or shares and the merged firm holding combined assets and liabilities.

The purchase of a controlling interest in another company, by buying shares or assets, which may preserve the target as a subsidiary rather than absorbing it into the buyer.

The extra value created when combined firms generate more cash flow than they would separately, through cost savings, revenue gains or better financing, justifying a premium over standalone value.

The excess of the offer price per share over the target's pre-announcement market price, paid to secure control and justified only if expected synergies exceed it.

The number of acquirer shares issued for each target share in a share-for-share merger, derived from the relative values assigned to the two companies and affecting ownership dilution.

Separating a business into distinct entities, by spin-off, split-off or split-up, to sharpen management focus, unlock valuation or satisfy regulatory conditions.

Reshaping a company's portfolio, capital or organisation through divestitures, demergers, buybacks or debt reorganisation to improve performance, value or financial viability.

Acquiring a company using substantial borrowed funds secured by the target's assets and cash flows, often taking it private, with repayment reliant on asset sales or improved operations.