What is Dry Powder? Dry powder refers to cash reserves that corporations and private equity funds have available to deploy when an attractive investment opportunity arises, or to weather a downturn. The cash reserves give their holders an advantage over other firms that do not keep reserves since they can be used to capitalize on…
What is Unitranche Debt? A Unitranche Debt is a hybrid loan structure that combines senior and subordinated debt into one debt instrument. The borrower of this type of loan pays a blended interest rate that falls between the rate of the senior debt and subordinated debt. Unitranche debts started in the United States in 2005…
Behavioral Finance Glossary This behavioral finance glossary is a helpful preparation guide to CFI’s behavioral finance course. Anchoring bias Relying on the first piece of information that’s encountered as a reference point (or anchor). Confirmation bias Our natural tendency is to listen to people who agree with us. It feels good to hear our own opinions…
What is Capital Structure? Capital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm’s capital structure is typically expressed as a debt-to-equity or debt-to-capital ratio. Debt and equity capital are used to fund a business’s operations, capital expenditures, acquisitions, and other…
What are Debt Covenants? Debt covenants are restrictions that lenders (creditors, debt holders, investors) put on lending agreements to limit the actions of the borrower (debtor). In other words, debt covenants are agreements between a company and its lenders that the company will operate within certain rules set by the lenders. They are also called…
What is ROIC? ROIC stands for Return on Invested Capital and is a profitability or performance ratio that aims to measure the percentage return that a company earns on invested capital. The ratio shows how efficiently a company is using the investors’ funds to generate income. Benchmarking companies use the ROIC ratio to compute the…
What are Activity Ratios? Activity ratios are financial metrics used to gauge how efficient a company’s operations are. The term can include several ratios that can apply to how efficiently a company is employing its capital or assets. Activity ratios are useful for comparing how a company’s performance is trending over time in a horizontal…
What is Vertical Analysis? Vertical analysis is an accounting tool that enables proportional analysis of documents, such as financial statements. While performing a vertical analysis, every line item on a financial statement is entered as a percentage of another item. For example, on an income statement, every line item is stated in terms of the…
What is Vertical Spread? Vertical spread is a trading strategy that involves trading two options at the same time. It is the most basic option spread. A combination of a long option and a short option at different strike prices, albeit with the same expiration or maturity dates, are executed, and the trade is collectively…
What is Backflush Costing? Backflush costing is an accounting method that records costs after a good is sold or a service is completed. Backflush costing is common among companies that use a Just-in-Time inventory management system. It avoids the costly and complicated reporting of all expenses as they occur, and instead “flushes” all expenses in…
