CMA Final Paper 14 (SFM) key terms

The loss in firm value caused by conflicts between shareholders and lenders, such as asset substitution or underinvestment, which lenders anticipate and price into interest rates and covenants.

A financing hierarchy holding that firms prefer internal funds first, then debt, and issue equity only as a last resort, because of information asymmetry and adverse selection costs.

The information conveyed to investors by a corporate action, such as a dividend increase or equity issue, which moves share price because outsiders read it as a cue about management's private view.

Direct and indirect costs incurred when a firm nears default, including legal and advisory fees, lost customers, supplier tightening, and key staff departures, which reduce operating value.

The view that a firm balances the tax shield from debt against rising expected bankruptcy and agency costs, producing an optimal leverage ratio where marginal benefits equal marginal costs.

A statistical estimate of the maximum loss on a portfolio over a stated horizon at a given confidence level, for example a one-day 95% VaR of 20 million.

The average loss in the worst tail of outcomes beyond the VaR threshold, also called conditional VaR; it is a coherent risk measure because it captures tail severity, not just a cutoff.

Comparing realised profit and loss against model-generated VaR forecasts to count exceptions, thereby testing whether a risk model's confidence level is calibrated correctly.

The risk that a hedging instrument's price and the hedged exposure do not move in perfect lockstep, leaving residual loss even when the hedge is in place.

The proportion of an exposure covered by hedging instruments, or the number of derivative contracts needed per unit of underlying to offset price changes.

Adjusting a position in the underlying asset so that the overall portfolio's value is insensitive to small changes in the underlying price, keeping net delta near zero.

Cash available to all capital providers after operating expenses, taxes, and reinvestment in working capital and fixed assets, computed before interest and discounted at the weighted average cost of capital.

Cash available to common shareholders after operating needs, taxes, interest, and net borrowing, discounted at the cost of equity to value equity directly.

The estimated value of a business at the end of an explicit forecast period, usually from a growing perpetuity of cash flows or an exit multiple applied to a final-year metric.

A valuation ratio, such as EV/EBITDA, applied to a company's forecast metric at a future date to estimate terminal or realisation value in a DCF or private equity setting.

The total value of a business's operating assets, equal to market capitalisation plus debt and preferred stock minus cash, representing the claim of all capital providers.

A measure of a stock's sensitivity to movements in the market portfolio; a beta above one means the stock amplifies market moves, and it drives the cost of equity in CAPM.

A model pricing an asset's expected return as the risk-free rate plus beta times the market risk premium, assuming investors hold diversified portfolios and are rewarded only for systematic risk.

Excess portfolio return over the risk-free rate divided by the portfolio's standard deviation, measuring reward per unit of total risk taken.

Excess return over the risk-free rate divided by beta, measuring reward per unit of systematic risk and suited to well-diversified portfolios.

Active return relative to a benchmark divided by tracking error, showing how efficiently a manager generates outperformance per unit of deviation from the benchmark.

The standard deviation of the difference between a portfolio's return and its benchmark's return, quantifying how closely the portfolio follows the index.

Pooling illiquid receivables such as loans or leases into a special purpose entity that issues marketable securities backed by the pool's cash flows.

A bankruptcy-remote legal entity created to hold securitised assets and issue securities against them, isolating the pool from the originator's credit risk.

A slice of a securitisation or structured deal with its own priority of claims, risk, and yield; senior tranches are paid first and absorb losses last.

Mechanisms that raise a securitisation's credit quality, such as subordination, overcollateralisation, reserve accounts, or guarantees, reducing losses for senior investors.

The principle that the forward exchange premium or discount between two currencies reflects the interest rate differential, so covered borrowing and investing yield equal returns.

Borrowing in one currency, converting and investing in another at a higher rate, and simultaneously buying a forward contract to lock in the exchange rate for a riskless profit.

The theory that exchange rates adjust so identical baskets of goods cost the same across countries, linking relative inflation differentials to expected currency depreciation.

The risk that exchange rate moves between contract date and settlement change the domestic-currency value of known foreign-currency receivables or payables.

Accounting risk that converting foreign subsidiaries' financial statements into the parent's reporting currency alters reported assets, earnings, or equity when rates change.

The long-run sensitivity of a firm's future cash flows and competitiveness to unexpected exchange rate changes, affecting pricing, costs, and market share.

A customised agreement to buy or sell an asset or currency at a fixed price on a future date, traded over the counter and settled by delivery or cash.

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

A negotiable certificate issued by a depositary bank representing shares of a foreign company held in custody, allowing US investors to trade the foreign stock in dollars.

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

The extra value created when two firms combine beyond the sum of their standalone values, arising from cost savings, revenue gains, or better capital allocation.

The amount an acquirer pays above the target's pre-announcement market value to obtain a controlling stake, reflecting expected synergies and competitive bidding.

Testing whether a merger raises or lowers the acquirer's earnings per share by comparing the combined pro forma earnings with the standalone figure, accounting for financing and shares issued.

The number of acquirer shares offered for each target share in a share-for-share merger, determining ownership split and the effective price paid.

A public invitation to a target's shareholders to sell their shares at a stated price within a deadline, often used in hostile or contested acquisitions.

The agreed value of a startup's equity before a new funding round, against which the incoming investment is priced to set the investor's ownership percentage.

The pre-money valuation plus the new money raised, representing the startup's value immediately after the financing closes and the basis for investor ownership.

A contractual right letting preferred investors recover a specified multiple of their investment before common shareholders when a startup is sold or wound up.

A clause protecting early investors from later down rounds by adjusting their conversion price, commonly on a full-ratchet or weighted-average basis.

The reduction in existing shareholders' ownership percentage caused by issuing new shares, options, or convertible securities.

A startup valuation approach that estimates terminal exit value, applies a target multiple of invested capital, and discounts back at a high required return to derive today's value.

The return shareholders require for holding a firm's shares, estimated from CAPM or a dividend growth model and used to discount equity cash flows.

The blended after-tax required return on a firm's debt and equity, weighted by their market values, used to discount free cash flow to firm.