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Shareholder Wealth Maximization: the primary financial goal for managers of publicly owned companies implies that decisions should be made to maximize the long-run value of the firm’s common stock. Intrinsic Value: an estimate of stock’s “true” value based on accurate risk and return data. Market Price: the stock value based on perceived but possibly incorrect information as seen by the marginal investor.Primary markets: markets in which corporations raise capital by issuing new securities. Secondary markets: markets in which securities and other financial assets are traded among investors after they have been issued by corporations. Public markets: markets in which standardized contracts are traded on organized exchanges. Private markets: markets in which transactions are worked out directly between two parties. Physical Location Exchanges: formal organizations having tangible physical locations that conduct auction markets in designated (“listed”) securities. Over-the-counter markets: A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities. Annual Report: a report issued annually by a corporation to its stockholders. Contains basic financial statements and management analysis of a firm’s past operations and future prospects. Balance Sheet: a statement of a firm’s financial position at a specific point in time. Income Statement: reports summarizing a firm’s revenues, expenses, and profits during a reporting period, generally quarter or a year. Working Capital: current assets. Free Cash Flow: the amount of cash that could be withdrawn without harming a firm’s ability to operate and to produce future cash flows. Liquidity Ratios: ratios that show the relationship of a firm’s cash and other current assets to its current liabilities. Asset Management Ratios: a set of ratios that measure how effectively a firm is managing its assets. Debt Management Ratios: a set of ratios that measure how effectively a firm manages its debt. Profitability Ratios: a group of ratios that show the combined effects of liquidity, asset management, and debt on operating results. Market Value Ratios: ratios that relate the firm’s stock price to its earnings and book value per share. DuPont Equation: a formula that shows that the rate of return on equity can be found as the product of profit margin, total assets turnover, and the equity multiplier. Shows the relationships among asset management, debt management, and profitability ratios. Future Value: the amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate. Present Value: the value today of a future cash flow or series of cash flows. Compounding: the arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied. Discounting: the process of finding the present value of a cash flow or a series of cash flows, discounting is the reverse of compounding. Annuity: a series of equal payments at fixed intervals for a specified number of periods. Perpetuity: a stream of equal payments at fixed intervals expected to continue forever. Effective Annual Rate of interest (EAR): the annual rate of interest actually being earned, as opposed to the quoted rate. Real risk-free rate of interest: the rate of interest would exist on default – free U.S. Treasury securities if no inflation were expected. Nominal risk-free rate: The rate of interest on a security that is free of all risk. It is proxied by the T-bill rate of the T-bond rate. Includes an inflation premium. Inflation premium: a premium equal to expected inflation that investors add to the real risk-free rate of return. Default risk premium: the difference between the interest rate on a U.S. Treasury bond and a corporate bond of equal maturity and marketability. Liquidity premium: a premium added to the equilibrium interest rate on a security if that security cannot be converted to cash on short notice and at close to its “fair market value.” Maturity risk premium: the additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. Yield curve: a graph showing the relationship between bond yields and maturities. Bond: a long-term debt instrument. Corporate Bonds: bonds issued by corporations. Treasury Bonds: bonds issued by the federal government, sometimes referred to as government bonds.