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Economies of scale

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Definition of Economies of scale

Economies Of Scale Image 1

Economies of scale

The decrease in the marginal cost of production as a plant's scale of operations increases.



Related Terms:

Economies of scope

Scope economies exist whenever the same investment can support multiple profitable
activities less expensively in combination than separately.


Scale

A bank that offers to pay different rates of interest on CDs of varying rates is said to "post a scale."
Commercial paper dealers also post scales.


Scale enhancing

Describes a project that is in the same risk class as the whole firm.


Scale in

When a trader or investor gradually takes a position in a security or market over time.


Logarithmic Scale

A scale in which equal proportions are shown as equal distances so that, for example, a doubling from 2 to 4 is represented by one inch, as is a doubling from 4 to 8.


Ratio Scale

See logarithmic scale.


accrual-basis accounting

Well, frankly, accrual is not a good descriptive
term. Perhaps the best way to begin is to mention that accrual-basis
accounting is much more than cash-basis accounting. Recording only the
cash receipts and cash disbursement of a business would be grossly
inadequate. A business has many assets other than cash, as well as
many liabilities, that must be recorded. Measuring profit for a period as
the difference between cash inflows from sales and cash outflows for
expenses would be wrong, and in fact is not allowed for most businesses
by the income tax law. For management, income tax, and financial
reporting purposes, a business needs a comprehensive record-keeping
system—one that recognizes, records, and reports all the assets and liabilities
of a business. This all-inclusive scope of financial record keeping
is referred to as accrual-basis accounting. Accrual-basis accounting
records sales revenue when sales are made (though cash is received
before or after the sales) and records expenses when costs are incurred
(though cash is paid before or after expenses are recorded). Established
financial reporting standards require that profit for a period
must be recorded using accrual-basis accounting methods. Also, these
authoritative standards require that in reporting its financial condition a
business must use accrual-basis accounting.


Economies Of Scale Image 1

Change in Reporting Entity

A change in the scope of the entities included in a set of, typically, consolidated financial statements.


fractional interest discount

the combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the ADF, Gordon model, or present value factor.


Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.


Accounts payable

Money owed to suppliers.


Accrued interest

The accumulated coupon interest earned but not yet paid to the seller of a bond by the
buyer (unless the bond is in default).


Agency bank

A form of organization commonly used by foreign banks to enter the U.S. market. An agency
bank cannot accept deposits or extend loans in its own name; it acts as agent for the parent bank.


Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.


Agency costs

The incremental costs of having an agent make decisions for a principal.


All-in cost

Total costs, explicit and implicit.


Economies Of Scale Image 1

Amortizing interest rate swap

Swap in which the principal or national amount rises (falls) as interest rates
rise (decline).


Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.


Balance of payments

A statistical compilation formulated by a sovereign nation of all economic transactions
between residents of that nation and residents of all other nations during a stipulated period of time, usually a
calendar year.


BAN (Bank anticipation notes)

Notes issued by states and municipalities to obtain interim financing for
projects that will eventually be funded long term through the sale of a bond issue.


Bank collection float

The time that elapses between when a check is deposited into a bank account and when the funds are available to the depositor, during which period the bank is collecting payment from the payer's bank.


Bank discount basis

A convention used for quoting bids and offers for treasury bills in terms of annualized
yield , based on a 360-day year.


Bank draft

A draft addressed to a bank.


Bank line

Line of credit granted by a bank to a customer.


Bank wire

A computer message system linking major banks. It is used not for effecting payments, but as a
mechanism to advise the receiving bank of some action that has occurred, e.g. the payment by a customer of
funds into that bank's account.


Banker's acceptance

A short-term credit investment created by a non-financial firm and guaranteed by a
bank as to payment. Acceptances are traded at discounts from face value in the secondary market. These
instruments have been a popular investment for money market funds. They are commonly used in
international transactions.


Bank for International Settlements (BIS)

An international bank headquartered in Basel, Switzerland, which
serves as a forum for monetary cooperation among several European central banks, the bank of Japan, and the
U.S. Federal Reserve System. Founded in 1930 to handle the German payment of World War I reparations, it
now monitors and collects data on international banking activity and promulgates rules concerning
international bank regulation.


Economies Of Scale Image 2

Bankruptcy

State of being unable to pay debts. Thus, the ownership of the firm's assets is transferred from
the stockholders to the bondholders.


Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.


Bankruptcy risk

The risk that a firm will be unable to meet its debt obligations. also referred to as default or insolvency risk.


Bankruptcy view

The argument that expected bankruptcy costs preclude firms from being financed entirely
with debt.


Base interest rate

Related: Benchmark interest rate.


Benchmark interest rate

also called the base interest rate, it is the minimum interest rate investors will
demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a
comparable-maturity Treasury security that was most recently issued ("on-the-run").


Best-interests-of-creditors test

The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.


Break-even lease payment

The lease payment at which a party to a prospective lease is indifferent between
entering and not entering into the lease arrangement.


Break-even payment rate

The prepayment rate of a MBS coupon that will produce the same CFY as that of
a predetermined benchmark MBS coupon. Used to identify for coupons higher than the benchmark coupon
the prepayment rate that will produce the same CFY as that of the benchmark coupon; and for coupons lower
than the benchmark coupon the lowest prepayment rate that will do so.


Capitalized interest

interest that is not immediately expensed, but rather is considered as an asset and is then
amortized through the income statement over time.


Carring costs

costs that increase with increases in the level of investment in current assets.


Cash flow after interest and taxes

Net income plus depreciation.


Cash flow from operations

A firm's net cash inflow resulting directly from its regular operations
(disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing
securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net
income.


Clearing House Automated Payments System (CHAPS)

A computerized clearing system for sterling funds
that began operations in 1984. It includes 14 member banks, nearly 450 participating banks, and is one of the
clearing companies within the structure of the Association for payment Clearing Services (APACS).


Clearing House Interbank Payments System (CHIPS)

An international wire transfer system for high-value
payments operated by a group of major banks.


Combination matching

also called horizon matching, a variation of multiperiod immunization and cash
flow matching in which a portfolio is created that is always duration matched and also cash-matched in the
first few years.


Combination strategy

A strategy in which a put and with the same strike price and expiration are either both
bought or both sold. Related: Straddle


Commercial draft

Demand for payment.


Commercial paper

Short-term unsecured promissory notes issued by a corporation. The maturity of
Commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less.


Commercial risk

The risk that a foreign debtor will be unable to pay its debts because of business events,
such as bankruptcy.


Compound interest

interest paid on previously earned interest as well as on the principal.


Consortium banks

A merchant banking subsidiary set up by several banks that may or may not be of the
same nationality. Consortium banks are common in the Euromarket and are active in loan syndication.


Contingent deferred sales charge (CDSC)

The formal name for the load of a back-end load fund.


Cost company arrangement

Arrangement whereby the shareholders of a project receive output free of
charge but agree to pay all operating and financing charges of the project.


Cost of capital

The required return for a capital budgeting project.


Cost of carry

Related: Net financing cost


Cost of funds

interest rate associated with borrowing money.


Cost of lease financing

A lease's internal rate of return.


Cost of limited partner capital

The discount rate that equates the after-tax inflows with outflows for capital
raised from limited partners.


Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. also called
the profitability index.


Coupon payments

A bond's interest payments.


Covered interest arbitrage

A portfolio manager invests dollars in an instrument denominated in a foreign
currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for
dollars.


Cross rates

The exchange rate between two currencies expressed as the ratio of two foreign exchange rates
that are both expressed in terms of a third currency.


Customary payout ratios

A range of payout ratios that is typical based on an analysis of comparable firms.


Date of payment

Date dividend checks are mailed.


Delivery versus payment

A transaction in which the buyer's payment for securities is due at the time of
delivery (usually to a bank acting as agent for the buyer) upon receipt of the securities. The payment may be
made by bank wire, check, or direct credit to an account.


Devaluation A decrease in the spot price of the currency



Differential disclosure

The practice of reporting conflicting or markedly different information in official
corporate statements including annual and quarterly reports and the 10-Ks and 10-Qs.


Differential swap

Swap between two LIBO rates of interest, e.g. yen LIBOR for dollar LIBOR. payments are
in one currency.


Direct paper

Commercial paper sold directly by the issuer to investors.


Discounted payback period rule

An investment decision rule in which the cash flows are discounted at an
interest rate and the payback rule is applied on these discounted cash flows.


Dividend payout ratio

Percentage of earnings paid out as dividends.


Dividend reinvestment plan (DRP)

Automatic reinvestment of shareholder dividends in more shares of a
company's stock, often without commissions. Some plans provide for the purchase of additional shares at a
discount to market price. Dividend reinvestment plans allow shareholders to accumulate stock over the Long
term using dollar cost averaging. The DRP is usually administered by the company without charges to the
holder.


Earnings before interest and taxes (EBIT)

A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and non-operating profit before
the deduction of interest and income taxes.


Effective annual interest rate

An annual measure of the time value of money that fully reflects the effects of
compounding.


Eligible bankers' acceptances

In the BA market, an acceptance may be referred to as eligible because it is
acceptable by the Fed as collateral at the discount window and/or because the accepting bank can sell it
without incurring a reserve requirement.


Equilibrium rate of interest

The interest rate that clears the market. also called the market-clearing interest
rate.


Equivalent annual cost

The equivalent cost per year of owning an asset over its entire life.


Euro CDs

CDs issued by a U.S. bank branch or foreign bank located outside the U.S. Almost all Euro CDs
are issued in London.


Eurobank

A bank that regularly accepts foreign currency denominated deposits and makes foreign currency loans.


Euro-commercial paper

Short-term notes with maturities up to 360 days that are issued by companies in
international money markets.


Ex post return

Related: Holding period return


Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing
costs.


Expected return on investment

The return one can expect to earn on an investment. See: capital asset
pricing model.


Export-Import Bank (Ex-Im Bank)

The U.S. federal government agency that extends trade credits to U.S.
companies to facilitate the financing of U.S. exports.


Feasible target payout ratios

payout ratios that are consistent with the availability of excess funds to make
cash dividend payments.


Federal Financing Bank

A federal institution that lends to a wide array of federal credit agencies funds it
obtains by borrowing from the U.S. Treasury.


Federal Home Loan Banks

The institutions that regulate and lend to savings and loan associations. The
Federal Home Loan banks play a role analogous to that played by the Federal Reserve banks vis-Ă -vis
member Commercial banks.


FHA prepayment experience

The percentage of loans in a pool of mortgages outstanding at the origination
anniversary, based on annual statistical historic survival rates for FHA-insured mortgages.


Financial distress costs

Legal and administrative costs of liquidation or reorganization. also includes
implied costs associated with impaired ability to do business (indirect costs).


Fixed cost

A cost that is fixed in total for a given period of time and for given production levels.


Fixed-rate payer

In an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a
floating-rate payment.


Flat price (also clean price)

The quoted newspaper price of a bond that does not include accrued interest.
The price paid by purchaser is the full price.


Floating-rate payer

In an interest rate swap, the counterparty who pays a rate based on a reference rate,
usually in exchange for a fixed-rate payment


Foreign banking market

That portion of domestic bank loans supplied to foreigners for use abroad.


Foreign direct investment (FDI)

The acquisition abroad of physical assets such as plant and equipment, with
operating control residing in the parent corporation.


Forward differential

Annualized percentage difference between spot and forward rates.


Forward interest rate

interest rate fixed today on a loan to be made at some future date.


Forward looking multiple

A truncated expression for a P/E ratio that is based on forward (expected)
earnings rather than on trailing earnings.


Friction costs

costs, both implied and direct, associated with a transaction. Such costs include time, effort,
money, and associated tax effects of gathering information and making a transaction.


Full-payout lease

See: financial lease.


Funds From Operations (FFO)

Used by real estate and other investment trusts to define the cash flow from
trust operations. It is earnings with depreciation and amortization added back. A similar term increasingly
used is Funds Available for Distribution (FAD), which is FFO less capital investments in trust property and
the amortization of mortgages.


Future investment opportunities

The options to identify additional, more valuable investment opportunities
in the future that result from a current opportunity or operation.


Futures contract multiple

A constant, set by an exchange, which when multiplied by the futures price gives
the dollar value of a stock index futures contract.


Graduated-payment mortgages (GPMs)

A type of stepped-payment loan in which the borrower's payments
are initially lower than those on a comparable level-rate mortgage. The payments are gradually increased over
a predetermined period (usually 3,5, or 7 years) and then are fixed at a level-pay schedule which will be
higher than the level-pay amortization of a level-pay mortgage originated at the same time. The difference
between what the borrower actually pays and the amount required to fully amortize the mortgage is added to
the unpaid principal balance.


Gross interest

interest earned before taxes are deducted.


Growth rates

Compound annual growth rate for the number of full fiscal years shown. If there is a negative
or zero value for the first or last year, the growth is NM (not meaningful).


Guaranteed investment contract (GIC)

A pure investment product in which a life company agrees, for a
single premium, to pay the principal amount of a predetermined annual crediting (interest) rate over the life of
the investment, all of which is paid at the maturity date.


Harmless warrant

Warrant that allows the user to purchase a bond only by surrendering an existing bond
with similar terms.


 

 

 

 

 

 

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