Corporate Finance Vocabulary in English

Dividends are payments made by a company to its shareholders from its profits or retained earnings. They represent a return on shareholders' investment and are typically paid quarterly or annually. Companies can pay cash dividends, issue additional shares, or buy back their own shares. The dividend payout ratio indicates what proportion of earnings is distributed versus retained for reinvestment. Growth companies often pay no dividends, preferring to reinvest profits, while mature companies in stable industries pay regular, predictable dividends.

A merger is the combination of two companies to form a new entity, while an acquisition is the purchase of one company by another. M&A activity is driven by strategic goals such as gaining market share, acquiring technology or talent, or achieving economies of scale. Transactions can be friendly (with board approval) or hostile (opposed by management). Due diligence — a thorough investigation of the target company's finances and operations — is a critical step before completing any deal.

Discounted cash flow (DCF) analysis is a valuation method that estimates the value of an investment based on its expected future cash flows, adjusted to reflect the time value of money. The principle is that money received in the future is worth less than money received today. DCF analysis requires forecasting future cash flows and selecting an appropriate discount rate, usually the WACC. The resulting present value represents what the investment is worth today.

A leveraged buyout (LBO) is the acquisition of a company using a significant amount of borrowed money to fund the purchase price. The assets of the acquired company often serve as collateral for the loans. LBOs are typically carried out by private equity firms that aim to improve the company's performance before selling it at a profit within three to seven years. The heavy use of debt means that LBOs can generate high returns but also carry substantial financial risk.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It is a widely used financial metric that approximates a company's operating cash flow and profitability by removing the effects of financing, accounting, and tax decisions. EBITDA is used to compare companies across different capital structures and tax environments. Critics note that it can be misleading because it ignores capital expenditure requirements and debt servicing costs, which are real cash obligations.

Equity financing is the raising of capital by selling shares in a company to investors. Shareholders become part-owners of the business and share in its profits and risks. Equity financing does not require repayment like debt, making it less risky in the short term. However, it dilutes existing shareholders' ownership and voting rights. Equity can be raised privately through venture capital or publicly through an initial public offering on a stock exchange.

The weighted average cost of capital (WACC) is the average rate a company expects to pay to finance its assets, weighted by the proportion of debt and equity. It represents the minimum return a company must earn on its investments to satisfy both debt holders and equity shareholders. WACC is used as the discount rate in DCF analysis and as a benchmark for evaluating capital investments. A project should only be undertaken if its expected return exceeds the WACC.

Due diligence is the comprehensive investigation and audit of a target company before completing a merger or acquisition. It covers financial statements, contracts, intellectual property, legal liabilities, tax obligations, and management quality. The purpose is to verify information provided by the seller, identify undisclosed risks, and provide a basis for the final purchase price. Poor due diligence has led to some of the most costly corporate failures in history.

Start with foundational terms: equity, debt, dividend, earnings, cash flow, capital structure, and valuation. Then build to more technical vocabulary: DCF, WACC, EBITDA, LBO, IPO, and hedging. Reading the Financial Times, Wall Street Journal, and Economist builds vocabulary in authentic context. For more structured learning, the CFA Institute's Level 1 curriculum provides comprehensive definitions and examples of all core corporate finance terms. Practise by explaining financial concepts in your own words, which consolidates understanding and prepares you for professional discussions.