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Business Risk
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The variability of returns (or profits) due to fluctuations in general economic conditions or conditions specifically affecting the firm. p.29
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Economic Cost
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All cost incurred to attract resources into a company's employ. Such costs includes explicit cost usually recognized on accounting records as well as opportunity costs. p.33
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Economic Profit
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Total revenue minus total economic cost. An amount of profit earned in a particular endeavor above the amount of profit that the form could be earning in its next best alternative activity. Also referred to as abnormal or above normal profit. p.32
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EVA
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Economic Value Added. The difference between a company's return on total capital and its cost of capital. p.32
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Financial Risk
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The variability of returns (or profits) induced by leverage (the proportion of a company financed by debt) The higher the leverage, the greater the potential fluctuation in stockholder earnings for a given change in profits. p.29
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Firm
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An organization that transforms resources into products demanded by consumers. The firm chooses to organize resources internally or to obtain them through the market.p.19
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MVA
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Market Value Added. The difference between market value (equity plus debt) of a company and the amount of capital investors have paid into a company. p.31
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Noneconomic objectives
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A company's objectives that do not appear to be governed by economic thinking but rather define how a business should act. p.25
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Normal profit
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An amount of profit earned in a particular endeavor that is just equal to the profit earned in a firm's next best alternative activity. It's revenue is just enough to cover both its accounting and opportunity costs. It can also be considered as the return to capital management necessary to keep resources engaged in a particular activity. p.33
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Opportunistic behavior
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One party to contract seeks to take advantage of the other. p.19
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Optimal decision
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The decision that enables the firm to meet its desired objectives most clearly. p.23
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Profit Maximization hypothesis
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The claim that a company will strive to attain the highest economic profit in each period. p.23
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Satisficing
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A concept in economics based on the principle that owners of a firm (esp. stockholders in a large corp.) may be content with adequate return and growth since they really cannot judge when profits will be maximized. p. 26
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Transaction costs
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Costs incurred by a firm in dealing with another firm, including the cost of investigation, negotiation, and enforcement of contracts. p. 19
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Wealth Maximization
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A company's management of its business in such a manner that the cash flows over time to the company, discounted at an appropriate rate, will cause the value of the company's stock to be at a maximum. p.30
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Agency Problem
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The divergence in objectives btw. owners and management whose goal is to increase revenue size rather than profits.
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