Dictionary of Exit Planning Terms

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C

C Corporation

An entity organized under state law with the rights of conducting business. A corporation has unlimited life. Regardless of that its owners and ceases to exist only if dissolved according to proper legal process liability of the owners is limited to the amount invested in the entity.

Capital Gain

A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price.

Capitalization

The conversion of future income into a present value by use of a capitalization factor usually expressed as a percentage, such as return on investment (ROI).

Capitalization of Earnings Method

A method of determining the value of the company by calculating the net present value of expected future profits and cash flows. The calculation takes last year's earnings and divides by the discount rate minus the growth rate adjusted for inflation. Although easy to calculate, this approach to valuation does not take into account any expected changes in earnings in future periods.

Cash Equivalents

Short-term investments do in a year or less. Similar to cash and liquidity and safety from market volatility.

Capital Asset Pricing Model (CAPM)

A financial model that determines the Cost of Capital for a firm based upon that firm's risk tolerance, the risk-free rate of return, and the expected return on the market in general.

Capital Gains Tax

Capital gains are generally taxed at a preferential rate in comparison to ordinary income. In 2003, this rate was reduced to 15%, and to 5% for individuals in the lowest two income tax brackets.

Capitalization Rate

The percentage rate used to determine the present value of a stream of future earnings. The rate is a subjective rate dependent upon the perceived risk associated with the business.

Cash Flow

A company's cash receipts minus its cash payments; or as an equivalent, if net profit plus depreciation and amortization charges, less capital expenditures, plus or minus changes in working capital.