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Finance

FINANCE

Corporate or Business Finance is basically the methodology of allocating financial resources, with a financial value, in an optimal manner to maximize the wealth of a business enterprise. There are three major decisions to be made in this allocation process: capital budgeting, financing, and dividend policy. Capital budgeting is the decision regarding the choice of which investments are to be made with the resources that have been brought into the business or earned and retained by the business. The choice depends on the returns to be made from the investment exceeding the cost of capital. The method used to do this is the discounted time-value of money of the cash flow from the investment. This value is the internal rate of return (IRR), a measure of return on investment. When the IRR exceeds the required return, which is equal to the cost of the funds invested (see weighted average cost of capital, below) then the investment should be made. If such a required return is used as the discount rate, then that is the same as saying the investment will yield a positive net present value (NPV). If there are two or more investments that can be made, but they are mutually exclusive, then they must be ranked, and the one with the highest NPV should be chosen. If there is a limited amount of funds to be invested, then some bankers or advisers who obtain additional funds for a business may require that the business choose among the investments so as not to exceed the limited level of funds available. This selection process, which is called capital rationing, should be done in a similar manner to rank the projects by selecting the combination of investments that do not exceed the total funds available and that yield the maximum total net present value.

Financing is the decision of which resources or funds are to be brought into the business from external investors and creditors in order to be invested in profitable projects. The first external source of finance is debt, which includes loans from banks and bonds purchased by bondholders. The debt creditors take less risk of nonrepayment because the business must repay them if there are funds available to do so when the debt becomes due. The second external source of finance is equity, which includes common stock and preferred stock. The equity investors in the business take more business risk and may not receive payment until the creditors are repaid and the management of the business decides to distribute funds back to the investors. The goal of the financing decision is to obtain all the resources necessary, to make all the investments that yield a return in excess of the cost of the funds invested or the required rate of return, and to obtain these funds at the lowest average cost, so as to reduce the required rate of return and increase the net present value of the projects selected.

Dividend policy is the decision regarding funds to be distributed or returned to the equity investors. This can be done with common stock dividends, preferred stock dividends, or stock repurchase by the business of its own stock. The aim of this decision is to retain the resources in the business that are required to run the business or make additional investments in the business, as long as the returns earned exceed the required return. In theory, management should return or distribute all resources that cannot be invested in the business at levels in excess of the required return. In practice, however, dividends are often maintained at or changed to certain levels in order to convey the proper signals to the investors and the financial markets. For example, dividends can be maintained at moderate levels to demonstrate stability, maintained at or reduced to low levels to demonstrate the growth opportunities for the business, or increased to higher levels to demonstrate the restoration of a strong financial (capital) structure (debt and equity capital) for the business.

Capital is the total of financial resources invested in the business. In terms of the sources, there are two types of capital: interest-bearing debt funds, such as loans, bonds, short-term notes, and interest-bearing payables to trade suppliers; and equity, such as common and preferred stock and the earnings retained in the business that add to stockholders' share of the entities. In terms of uses, there are also two types of capital: net working capital, such as operating cash, inventory, and receivables, less interest-free payables to trade suppliers; and fixed capital, such as property, plant, and equipment. Capital is managed to maximize wealth by maximizing the rates of return on investments of capital and thus maximizing the total net present value of the business. This can be done by minimizing the amount of capital used for given business investments with given business returns.

Weighted average cost of capital is the weighted average of the returns on investment or future dividends for the stockholders and interest rates on debt for the creditors. This average return should be used as the required return for investments, as mentioned earlier, because it represents the weighted average of the required returns of all the different debt creditors and equity investors. It also represents the weighted average of the costs that can be saved by the business if the resources or financial funds are returned to the creditors and investors instead of being used for investments within the business.

Capital structure is represented by the types of sources of capital funds invested in the business. A common measure of sources is the percentage of debt relative to equity that appears on a company's balance sheet. Usually, the cost or required returns for the debt is much less than the equity, especially on an after-tax basis. Thus, the total cost of capital declines when some debt funds from creditors are substituted for equity funds from investors. Yet as more debt is added, the business becomes riskier because of the higher amount of fixed payments that must be made to creditors, whether or not the business is generating adequate funds from earnings; and then the costs of both the debt and equity funds are increased to the point where the weighted-average cost increases.

Acquisitions, which are purchases of other businesses, are merely another type of capital budgeting investment for a business. Such purchases should be evaluated in the same manner as any other capital investment, as outlined earlier, to obtain the maximum positive net present value, though the issues and data are often more complex to analyze.

Price/earnings ratio is often used in making acquisitions as an abbreviated measure of valuation. This ratio is of the value or price of a business or its stock to its earnings. Yet the actual decision to make an acquisition is a capital budgeting decision; the resultant determination of price or net present value can then be described in relative terms to the earnings in the price/earnings ratio.

Returns for any business or particular debt or investment made in the business are merely the cash flows that will ultimately be earned by the business or particular creditors and stockholders. These can be expressed in dollar terms or as percentages, with the latter being the average annual percentage of the cash flows relative to the overall investment in the business or the particular amounts of debt or stock involved. For debt instruments, these percentage rates are called interest rates. For specific investment decisions, the returns used should be those that are incremental of the specific investment.

Return/interest rates are based on three components: pure return for the investor or creditor providing funds; coverage of inflation rates, so that the purchasing power of the proceeds is maintained apart from the true return; and additional return for additional risk, such as an equity investment in a risky business as opposed to a bond from the U.S. government. These components are then compounded with each other, rather than merely added together, to obtain the overall interest rate or required return on equity investment. When calculating return or interest rates, any additional up-front money, such as closing costs, must also be added to the investment; this amount increases or reduces the return, depending on who pays for it.

Residual values are a portion of the returns to be earned in an investment that is returned to the business when the investment is sold or the project is terminated. This can be most important in the liquidation of inventory and receivables when operations of a portion of a business are terminated or when real estate ceases to be required and thus can be sold, for example, when a factory is closed or when a lease term is complete.

Maturities of debt instruments, such as bonds, loans, or notes payable, are the amounts of time outstanding before the debt becomes due. The financial management rule with respect to maturities is to match the duration of the funds being borrowed by the debtor, or invested by the creditor, with the timing of his or her own business needs for funds in the future. Thus, the financing of a new businesswith the likely future expansions of property, plant, equipment, inventory, and receivablescan be done with longer-term debt funds. Yet the financing of a specific shorter-term need, such as the outlays on a construction project before completion payments are made, should be comparably shorter in maturity. Similarly, the investment of temporary excess cash should be in shorter-term instruments, such as short-term CDs or Treasury bills. If maturities are not matched, then the additional time before the debt becomes due from or to the investor becomes a period of speculation on the rise or fall of future interest rates.

International finance is concerned with the same methodology of allocating financial resources, but with modifications or areas of emphasis required by the restrictions of currency and capital movements among countries and the differences in the currencies used in different countries. The following paragraphs represent some of the major changes to the basic financial decisions:

  1. Foreign capital budgeting requires the use of foreign cash flows and local tax rates, but U.S. inflation rates and U.S. dollars at the current exchange rates can be used. The required return or cost of capital then need only be adjusted, as with any investment, for the greater or lesser risk of the project in which the investment is made, which includes the greater or lesser risk of the country in which the investment is being made.
  2. Foreign capital markets are a source for both debt and equity funds, for both foreign subsidiary operations and the general needs of the overall business. Foreign subsidiary capital structures often utilize more local debt when legally and practically available in order to reduce the risk of blockages of earned funds from repatriation to the parent company in another country. In addition, local-currency debt reduces the risk for the parent company if the exchange rates for the local currency change adversely.
  3. Foreign-exchange rates can change dramatically and therefore pose a significant risk for the value of assets held in or future payments from foreign countries. These exposures may be in dealings with third parties or within a company's own foreign subsidiaries. Forward currency contracts or currency options, instruments used to purchase one currency for another currency in the future at guaranteed exchange rates, can be used to protect against such risk. While these contracts are often also used to make profits by managers who believe the exchange rates will change in a manner different from the expectations implicit in the overall currency market, such use should be viewed as risky speculation.
  4. Personal finance is concerned with the same methodology of allocating resources, but with a greater emphasis on allocating some of them to obtain the maximum consumption satisfaction at the lowest cost, as opposed to earning income and cash flow returns on the investments.
  5. Budgeting and financial planning are the processes used by financial managers to forecast future financial results for a business, a person, or a particular investment. Usually, the major components of earnings, cash flow, and capital are projected in the form of forecasted income statements, cash-flow statements, and balance sheets. The latter show where the capital funds are invested in the components of fixed and working capital, as well as the sources of these capital funds in terms of the debt, stock, and retained earnings.

ISSUES IN APPLIED CORPORATE FINANCE AND VALUATION

Estimation of the Cost of Capital

In recent decades, theoretical breakthroughs in such areas as portfolio diversification, market efficiency, and asset pricing have converged into compelling recommendations about the cost of capital to a corporation. The cost of capital is central to modern finance, touching on investment and divestment decisions, measure of economic profit, performance appraisal, and incentive systems. Each year in the United States, corporations undertake more than $500 billion in expenditures, so how firms estimate the cost is not a trivial matter. A key insight from finance theory is that any use of capital imposes an opportunity cost on investors; namely, funds are diverted from earning a return on the next-best equal risk investment. Since investors have access to a host of financial market opportunities, corporate use of capital must be benchmarked against these capital market alternatives. The cost of capital provides this benchmark. Unless a firm can earn in excess of its cost of capital, it will not create economic profit or value for investors. A recent survey of leading practitioners reported the following best practices:

  • Discounted cash flow (DCF) is the dominant investment-evaluation technique
  • Weighted average cost of capital (WACC) is the dominant discount rate used in DCF analyses
  • Weights are based on market, not book, value mixes of debt and equity
  • The after-tax cost of debt is predominantly based on marginal pretax costs, as well as marginal or statutory tax rates
  • The capital asset pricing model (CAPM) is the dominant model for estimating the cost of equity

Discounted Cash Flow Valuation Models

The parameters that make up the DCF model are related to risk (the required rate of return) and the return itself. These models use three alternative cash-flow measures: dividends, accounting earnings, and free cash flows. Just as DCF and asset-based valuation models are equivalent under the assumption of perfect markets, dividends, earnings, and free cash-flow measures can be shown to yield equivalent results. Their implementation, however, is not straightforward. First, there is inherent difficulty in defining the cash flows used in these models. Which cash flows and to whom do they flow? Conceptually, cash flows are defined differently depending on whether the valuation objective is the firm's equity or the value of the firm's debt plus equity. Assuming that one can define cash flows, one is left with another issue. The models need future cash flows as inputs. How is the cash-flow stream estimated from present data? More important, are current and past dividends, earnings, or cash flows the best indicators of that stream? These pragmatic issues determine which model should be used. Although the dividend model is easy to use, it presents a conceptual dilemma. Finance theory says that dividend policy is irrelevant. The model, however, requires forecasting dividends to infinity or making terminal value assumptions. Firms that currently do not pay dividends are a case in point. Such firms are not valueless. In fact, high-growth firms often pay no dividends, because they reinvest all funds available to them. When firm value is estimated using a dividend discount model, it depends on the dividend level of the firm after its growth stabilizes. Future dividends depend on the earnings stream the firm will be able to generate. Thus, the firm's expected future earnings are fundamental to such a valuation. Similarly, for a firm paying dividends, the level of dividends may be a discretionary choice of management that is restricted by available earnings. When dividends are not paid out, value accumulates within the firm in the form of reinvested earnings. Alternatively, firms sometimes pay dividends right up to bankruptcy. Thus, dividends may say more about the allocation of earnings to different claimants than valuation. All three DCF approaches rely on a measure of cash flows to the suppliers of capital (debt and equity) to the firm. They differ only in the choice of measurement, with the dividend approach measuring the cash flows directly and the others arriving at them in an indirect manner. The free cash-flow approach arrives at the cash-flow measure (if the firm is all-equity) by subtracting investment from operating cash flows, whereas the earnings approach expresses dividends indirectly as a fraction of earnings.

The Capital Asset Pricing Model

This is a set of predictions concerning equilibrium expected returns on risky assets. Harry Markowitz established the foundation of modern portfolio theory in 1952. The CAPM was developed twelve years later in articles by William Sharpe, John Lintner, and Jan Mossin. Almost always referred to as CAPM, it is a centerpiece of modern financial economics. The model provides a precise prediction of the relationship that we should observe between the risk of an asset and its expected return. This relationship serves two vital functions. First, it provides a benchmark rate of return for evaluating possible investments. For example, if one is analyzing securities, one might be interested in whether the expected return we forecast for a stock is more or less than its "fair" return given its risk. Second, the model helps one to make an educated guess as to the expected return on assets that have not yet been traded in the marketplace. For example, how does one price an initial public offering of stock? How will a new investment project affect the return investors require on a company's stock? Although the CAPM does not fully withstand empirical tests, it is widely used because of the insight it offers and because its accuracy suffices for many important applications. Although the CAPM is a quite complex model, it can be reduced to five simple ideas:

  • Investors can eliminate some risk (unsystematic risk) by diversifying across many regions and sectors
  • Some risk (systematic risk), such as that of global recession, cannot be eliminated through diversification. So even a basket with all of the stocks in the stock market will still be risky
  • People must be rewarded for investing in such a risky basket by earning returns above those that they can get on safer assets
  • The rewards on a specific investment depend only on the extent to which it affects the market basket's risk
  • Conveniently, that contribution to the market basket's risk can be captured by a single measurebetathat expresses the relationship between the investment's risk and the market's risk

Finance theory is evolving in response to innovative products and strategies devised in the financial marketplace and in academic research centers.

see also Careers in Finance; Ethics in Finance; Finance: Historical Perspectives

bibliography

Bodie, Zvi, Kane, Alex, and Marcus, Alan J. (1999). Investments (6th ed.). Boston: McGraw-Hill/Irwin.

Bruner, Robert F. (2003). Case Studies in Finance: Managing for Corporate Value Creation (4th ed.). Boston: McGraw-Hill/Irwin.

Bruner, Robert F., Eades, Kenneth M., Harris, Robert S., and Higgins, Robert C. (1998). " 'Best Practices' in Estimating the Cost of Capital: Survey and Synthesis." Journal of Financial Practice and Education 8:1, 13-28.

Kaushik, Surendra K., and Krackov, Lawrence M. (1989). Multinational Financial Management. New York: New York Institute of Finance.

Stein, Jeremy (1996). "Rational Capital Budgeting in an Irrational World." The Journal of Business 69:4, 429-55.

White, Gerald I., Sondhi, Ashwinpaul C., and Fried, Dov (2003). The Analysis and Use of Financial Statements (3rd ed.). Hoboken, NJ: Wiley.

Surendra K. Kaushik

Lawrence M. Krackov

Massimo Santicchia

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Kaushik, Surendra; Krackov, Lawrence; Santicchia, Massimo. "Finance." Encyclopedia of Business and Finance, 2nd ed.. 2007. Retrieved August 25, 2016 from Encyclopedia.com: http://www.encyclopedia.com/doc/1G2-1552100130.html

Finance

Finance

BIBLIOGRAPHY

Finance refers to the study of the management of the assets of firms and households over time, given the calculated risks and expected returns. Also known as financial economics, it is one of the more recent fields in economics, with most of the key papers published after the middle of the twentieth century. The field of finance primarily includes: portfolio theory, which deals with how to achieve the maximum investment return for a given level of risk by diversifying between a risk-free asset and a portfolio of risky assets; asset pricing, which deals with the pricing of risky assets; and corporate finance, which explains corporate financial and investment decisions.

Modern finance started with the publication in 1952 of an article by Harry Markowitz (a 1990 Nobel laureate in economics) on portfolio selection. Markowitz introduced the notion of the mean-variance efficient portfolio, defined as the portfolio that provides either minimum variance for a given expected return, or maximum expected return for a given variance. Assuming a risk-averse investor, Markowitz proved that any other portfolio would not be optimal.

The next key contribution came more than a decade later in the area of asset pricing by William Sharpe (1964), John Lintner (1965), and Jan Mossin (1966) with the capital asset pricing model (CAPM). The model provides an equilibrium relationship between the risk of an asset and its expected return above the return of the risk-free asset. According to this relationship, the expected return of a risky asset in excess of the return of a risk-free asset, the so-called risk premium, is proportional to the risk premium of a portfolio holding the whole market and the extent to which the risky asset and the market move together, which is called the beta coefficient. The model implies that any other specific risk (nonmarket risk) can be diversified away and therefore does dot justify any risk premium. A decade later, Stephen Rosss (1976) arbitrage pricing theory (APT) proved that a similar relationship holds when one assumes no arbitrage opportunities (an arbitrage opportunity exists when a zero investment portfolio can yield a positive profit with certainty). The APT is less restrictive than the CAPM, since it only needs a few investors taking advantage of any existing arbitrage opportunities, eventually eliminating mispriced securities, while the CAPM assumes that all investors are mean-variance optimizers. Furthermore, the APT extends the CAPM by including other factors in addition to the market (multi-factor models), such as macroeconomic variables.

Modern corporate finance theory, which studies a firms financing decisions and its evaluation of investment projects based on expected returns, has been primarily built on two theorems: the Modigliani-Miller theorem of capital structure (1958) and the Modigliani-Miller dividend policy theorem (1961), which are also known as the MM theorems. The first theorem states that the financing decision of a firm between debt and equity does not affect its value, while the second states that the dividend policy of a firm also does affect its value. The MM theorems gave their two authors the Nobel Prize in Economics (in 1985 for Franco Modigliani and in 1990 for Merton Miller) and led to a huge literature to explain why the theorems may not hold. The practice of corporate finance is much broader. A typical corporate finance department in an investment bank deals primarily with initial public offerings (IPOs) and other underwriting services, as well as mergers and acquisitions.

The main financial assets include stocks (also called equity or shares) and fixed-income securities (also called bonds). Stocks are securities issued by private-owned firms to raise capital and are traded in the capital (or stock) markets (or exchanges). The investors return is determined by the dividend paid by the issuing firm and the change in the stock price (capital gain or loss). The equity holders of the company are its residual claimants, meaning that in the case that the company goes bankrupt, their compensation equals whatever is left (if anything) after all debt holders have been paid. Fixed-income securities are issued either by private or state-owned firms or by governments (central and local) to raise debt and are claims on a stream of income over a predetermined period. Their interest rate (also called the coupon rate) determines the stream of income during the life of the bond, in addition to the payment of the face value at maturity. Although the investors return is certain if the bond is held to maturity, and assuming the company does not go bankrupt, the return is uncertain if the investor decides to sell the bond before maturity, since the price of the bond fluctuates as the bond is traded in the market.

Since the mid-1970s, the study of more exotic financial instruments has gained popularity, and the trading of derivative securities has spread widely in the capital markets. Derivative securities (or contingent claims, or simply derivatives) are securities whose value depends on other securities. They include options, forward contracts, futures, swaps, and many other securities that give the right to its holder to buy, sell, or exchange the underlined security or securities under prespecified conditions. A call (put) option provides the option to its holder to buy (sell) a security by a prespecified date, at a prespecified price, called the exercise or strike pricethe call (put) option will be exercised only if the market price is higher (lower) that the exercise price. A forward contract is an agreement to buy or sell a security at a prespecified date, at a prespecified price. A future contract is a forward contract that is traded in the market. In contrast to options, forward and future contracts are always exercised. Swaps are agreements to exchange cash flows during a prespecified period and based on a predetermined formula. The popularity of derivative securities increased rapidly in the years that followed the publication of the Black and Scholes option pricing formula (Black and Scholes 1973; Merton 1973), which gave Myron Scholes and Robert Merton the 1997 Nobel Prize in EconomicsFischer Black died two years before the award. The beauty of the formula is that it includes only known variables, as it depends on the volatility of the price of the underlined stock rather than its expected return.

The main function of derivative securities is risk insurance (hedging), although derivatives are also used for speculation. To use some examples, a put option insures a stockholder from a fall in the stock price below the exercise price, a forward contract provides a fixed payment to a farmer for his or her future production regardless of weather conditions, and a swap agreement allows a firm to exchange a floating stream of revenue with a fixed stream in order to pay its fixed obligations. On the other hand, derivatives allow speculators to take large bets with relatively small initial capital, since instead of paying for the whole price of the underlined security they only have to pay the much lower price of the derivative. Speculators can take very large exposures using derivatives that can lead to huge gains or losses. Recent examples of such speculation going bad include the collapse of Britains Barings Bank in 1995 from speculation from a single trader in its Singapore office, and the collapse of the U.S. hedge fund Long-Term Capital Management, which after an annual return of more than 40 percent in the 19941997 period, lost $4.6 billion in just four months in 1998 and had to be rescued by a package from leading U.S. investment and commercial banks orchestrated by the Federal Reserve (ironically, Scholes and Merton were on the board of the fund).

The trading of the financial instruments takes place in financial markets, while the financial transactions are performed by financial institutions and investors. The financial markets include the money market (trading of very short-term debt securities), the bond market, the stock market, and various derivative markets. A stock is first sold in a stock market through an IPO and is then traded in secondary markets. Some stocks are traded in informal exchanges, called over-the-counter markets (or OTC). The financial institutions can be separated into banks and nonbanks, although this distinction is not always clear and todays large and often multinational, or even global, financial conglomerates offer the whole range of financial services. The first includes primarily commercial banks, savings institutions, and credit unions, while the second includes investment banks, insurance companies, leasing companies, and investment funds.

Finance is linked with other fields in economics and is increasingly relevant for economic policy. Macroeconomists study finance to understand how capital markets affect the impact of economic policies on the economy. Effective monetary policy requires the knowledge of its potential impact on capital markets but also on the way capital markets allow the transmission of monetary policy itself. International economics includes the study of international finance (also called open-economy macroeconomics), which studies, among other issues, the interaction of international capital markets and the movement of capital across borders. The field of finance also uses concepts and tools from other fields to extend its understanding of capital markets and investment decisions. It uses microeconomic theory to explain the decisions of rational investors based on utility maximization, econometrics to study the behavior (trends and patterns) of financial variables, and mathematics to model the behavior of financial markets and of investors and to price financial assets.

It should be emphasized that finance is not what most noneconomists believe it is, which is the study of how to make money. In such a case, all financial economists, quite smart people indeed, would have been rich. If anything, the field argues that markets are efficient and that one cannot consistently outperform the market those who sometimes do are just lucky. There is a huge literature attempting to find evidence against the so-called efficient market hypothesis (EMH). Although some studies have discovered some patterns against the hypothesis, either there is no money to make once transaction costs are taken into account or the patterns disappear soon after being discovered as investors take advantage of them. The EMH suggests that in order to outperform the market one would need to have superior information from the other investors, which is impossible, except in the case of inside information. However, trading based on inside information, although not rare, is illegal in most countries.

The ongoing globalization process and the tremendous advances in information technology in recent decades are having a profound impact on the field of finance. Investors diversify by choosing from investment opportunities provided by a global market, firms can issue stocks at stock markets abroad, governments can sell their bonds to foreign investors, and speculators can bet against more or less any foreign currency they choose. The large size of international capital movements allows emerging markets to finance their development using foreign capital. However, when the investors appetite for risk changes, either because of bad economic policies in the recipient countries or due to negative spillover effects from policies or shocks in other countries, the result can be a serious economic slowdown, or even a banking and a broader financial crisis, as shown by the crises in Mexico (1994), East Asia (19971998), Russia (1998), and Argentina (2001).

Optimists argue that the best is yet to come in the field of finance. Their belief is based on the argument that the use of advanced financial instruments and information technology has just started. Robert Shiller (2003) proposes a new financial order in which it will be possible to insure against more or less any nonfinancial risk. Individuals will be able to insure against their uncertain income from the profession of their choice or against unexpected negative shocks to their economic well-being, countries will be able to sell debt with a repayment plan that depends on their economic growth, and different generations will be able to share the cost of social security. According to pure financial theory, one should be able to sell any kind of risk to someone willing to buy it for the right price and diversify it away. Indeed, this is increasingly seen in todays global financial markets.

SEE ALSO Corporations; Equity Markets; Financial Instability Hypothesis; Financial Markets; Investment; Merton, Robert K.; Modigliani, Franco; Modigliani-Miller Theorem; Shocks; Stock Exchanges

BIBLIOGRAPHY

Black, Fischer, and Myron Scholes. 1973. The Pricing of Options and Corporate Liabilities. Journal of Political Economy 81: 637654.

Lintner, John. 1965. The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. Review of Economics and Statistics 47: 1337.

Markowitz, Harry M. 1952. Portfolio Selection. Journal of Finance 7 (1): 7791.

Merton, Robert C. 1973. Theory of Rational Option Pricing. Bell Journal of Economics and Management Science 4: 141183.

Miller, Merton H., and Franco Modigliani, 1961. Dividend Policy, Growth, and the Valuation of Shares. Journal of Business 34 (4): 411433.

Modigliani, Franco, and Merton H. Miller. 1958. The Cost of Capital, Corporation Investment, and the Theory of Investment. American Economic Review 48: 261297.

Mossin, Jan. 1966. Equilibrium in a Capital Asset Market. Econometrica 34: 768783.

Ross, Stephen A. 1976. Return, Risk, and Arbitrage. In Risk and Return in Finance, ed. Irwin Friend and James Bicksler. Cambridge, MA: Ballinger.

Sharpe, William. 1964. Capital Asset Prices: A Theory of Market Equilibrium. Journal of Finance 19 (3): 425442.

Shiller, Robert J. 2003. The New Financial Order: Risk In the 21st Century. Princeton, NJ: Princeton University Press.

Athanasios Vamvakidis

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Finance

160. Finance

See also 131. DUES and PAYMENT ; 137. ECONOMICS ; 276. MONEY .

acceptance
1. the acknowledgment of a bill of exchange, in writing across the back, binding the acceptor to make payment.
2. the bill so endorsed.
actuary
a statistician of an insurance company who calculates risks and premiums.
agio
1. the exchange rate between the currencies of different nations.
2. the fee paid to effect an exchange of currency. See also agiotage.
agiotage
the business of trading or speculating in foreign exchange. Also called agio .
amortization, amortizement
the paying off of a debt in equal installments composed of gradually changing amounts of principal and interest.
annuity
an investment that bears a fixed return yearly, for a fixed period or for the life of the recipient.
bursary
the treasury, especially of a college. See also 240. LEARNING .
cambism
cambistry. cambist , n.
cambist
1. a dealer in bills of exchange.
2. a handbook listing the exchange values of moneys and the weights and measures of many countries.
cambistry
the branch of economics that studies commercial exchange, especially international money values. Also cambism.
debenture
an interest-bearing bond, often issued by corporations, usually unsecured but sometimes with a preferred status over other obligations of the issuer.
delinquency
1. the condition of being in arrears in payment of a debt.
2. the condition of a debt when overdue. See also 239. LAW .
entrepreneurship
1. the state, quality, or condition of being an entrepreneur, an organizer or promoter of business ventures.
2. the duration of a persons function as an entrepreneur.
fiduciary
one who holds in trust; a trustee or depositary. See also 392. THEOLOGY .
hypothecation
1. the process of pledging property as security for a debt.
2. a claim made against property so pledged. hypothecator , n. hypothecary , adj.
mortgage
1. the giving of property, usually real property, as security to a creditor for payment of a debt.
2. the deed pledging the security.
tontine
1. an annuity, or loan, based on a group of annuities that are shared among several people with the provision that as each person dies his share is spread among those remaining, and the entire amount accrues to the survivor of them all.
2. the members of the group collectively.
3. each members total share or annuity. tontine , adj.
usury
1. the lending of money at excessive interest rates, especially rates above legal limits.
2. the excessive interest rate charged. usurer , n. usurious , adj.
Wall Streetese
language typical of that used on Wall Street and in the financial markets, characterized by use of technical financial terms and arcane stock-market jargon.

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"Finance." -Ologies and -Isms. 1986. Encyclopedia.com. 25 Aug. 2016 <http://www.encyclopedia.com>.

"Finance." -Ologies and -Isms. 1986. Encyclopedia.com. (August 25, 2016). http://www.encyclopedia.com/doc/1G2-2505200171.html

"Finance." -Ologies and -Isms. 1986. Retrieved August 25, 2016 from Encyclopedia.com: http://www.encyclopedia.com/doc/1G2-2505200171.html

finance

finance, theory and practice of conducting large public and private dealings in money. Important institutions of private finance include those that deal with insurance, banking, stocks (see stock), bonds, and other securities. With the development of the national state, public finance—the management of the revenues, expenditures, and debts of the state—has been of great political, as well as economic, importance. The most important source of government revenue is taxes, but sale of public properties and franchises, as well as the sale of interest-bearing bonds, also contribute. Since the Korean War, a large part of governmental expenditures has gone for various military and defense needs. Other important areas of governmental expenditure are health, education, and welfare (the Social Security, Medicare, and Medicaid programs); interest on the national debt; and public works. Important institutions of international finance are the International Bank for Reconstruction and Development and the International Monetary Fund.

See D. Allen, Finance (1983); D. Swain, Managing Public Money (1987); L. Harris et al., ed., New Perspectives on the Financial System (1988); N. Gianaris, Contemporary Public Finance (1989).

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"finance." The Columbia Encyclopedia, 6th ed.. 2016. Encyclopedia.com. 25 Aug. 2016 <http://www.encyclopedia.com>.

"finance." The Columbia Encyclopedia, 6th ed.. 2016. Encyclopedia.com. (August 25, 2016). http://www.encyclopedia.com/doc/1E1-finance.html

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Finance

266. Finance (See also Money.)

  1. Bourse the Paris stock exchange. [Fr. Commerce: Misc.]
  2. Dow Jones the best known of several U.S. indexes of movements in price on Wall Street. [Am. Hist.: Payton, 202]
  3. Lombard Street London bankers row; named for 13th-century Italian moneylenders. [Br. Hist.: Plumb, 15]
  4. Old Lady of Threadneedle Street nickname for the Bank of England. [Br. Culture: Misc.]
  5. Praxidice goddess of commerce. [Gk. Myth.: Kravitz, 88]
  6. Rockefeller, John D(avison ) (18391937) multimillionaire oil tycoon and financier, [Am. Hist.: EB, VIII: 623]
  7. Throgmorton Street location of Stock Exchange; by extension, financial world. [Br. Hist.: Brewer Dictionary, 1079]
  8. Wall Street N.Y.C. financial district. [Am. Hist.: Jameson, 530]

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"Finance." Allusions--Cultural, Literary, Biblical, and Historical: A Thematic Dictionary. 1986. Encyclopedia.com. 25 Aug. 2016 <http://www.encyclopedia.com>.

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finance

fi·nance / ˈfīnans; fəˈnans/ • n. the management of large amounts of money, esp. by governments or large companies. ∎  monetary support for an enterprise: housing finance. ∎  (finances) the monetary resources and affairs of a country, organization, or person. • v. [tr.] provide funding for (a person or enterprise): the city originally financed the project.

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"finance." The Oxford Pocket Dictionary of Current English. 2009. Encyclopedia.com. 25 Aug. 2016 <http://www.encyclopedia.com>.

"finance." The Oxford Pocket Dictionary of Current English. 2009. Encyclopedia.com. (August 25, 2016). http://www.encyclopedia.com/doc/1O999-finance.html

"finance." The Oxford Pocket Dictionary of Current English. 2009. Retrieved August 25, 2016 from Encyclopedia.com: http://www.encyclopedia.com/doc/1O999-finance.html

finance

finance †end; †settlement, payment XIV; supply, stock; †tax, taxation XV; (pl.) pecuniary resources; management of (public) money XVIII. — (O)F. finance †end, †payment, money, f. finer make an end, settle, procure, f. -fin end, FINE1.
Hence financial XVIII. So financier XVII. — F.

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T. F. HOAD. "finance." The Concise Oxford Dictionary of English Etymology. 1996. Encyclopedia.com. 25 Aug. 2016 <http://www.encyclopedia.com>.

T. F. HOAD. "finance." The Concise Oxford Dictionary of English Etymology. 1996. Encyclopedia.com. (August 25, 2016). http://www.encyclopedia.com/doc/1O27-finance.html

T. F. HOAD. "finance." The Concise Oxford Dictionary of English Etymology. 1996. Retrieved August 25, 2016 from Encyclopedia.com: http://www.encyclopedia.com/doc/1O27-finance.html

finance

financeaskance, expanse, finance, Hans, Hanse, manse, nance, Penzance, Romance •underpants • happenstance •advance, Afrikaans, à outrance, chance, dance, enhance, entrance, faience, France, glance, lance, mischance, outdance, perchance, prance, Provence, stance, trance •nuance • tap-dance • square dance •freelance • convenance •cense, commence, common sense, condense, dense, dispense, expense, fence, hence, Hortense, immense, offence (US offense), pence, prepense, pretence (US pretense), sense, spence, suspense, tense, thence, whence •ring-fence • recompense •frankincense •chintz, convince, evince, Linz, mince, Port-au-Prince, prince, quince, rinse, since, Vince, wince •province •bonce, ensconce, nonce, ponce, response, sconce •séance • pièce de résistance •announce, bounce, denounce, flounce, fluid ounce, jounce, mispronounce, ounce, pounce, pronounce, renounce, trounce •dunce, once

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"finance." Oxford Dictionary of Rhymes. 2007. Encyclopedia.com. 25 Aug. 2016 <http://www.encyclopedia.com>.

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"finance." Oxford Dictionary of Rhymes. 2007. Retrieved August 25, 2016 from Encyclopedia.com: http://www.encyclopedia.com/doc/1O233-finance.html

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