Glossary

Note: Chapter numbers in brackets [ ] indicate the chapter in which the term is introduced. Terms marked with an asterisk are discussed in more than one chapter.

For definitions of finance and accounting terms not found in this glossary, visit the “Glossary Portal” section of the text's web site, Wachowicz's Web World at http://web.utk.edu/~jwachowi/glossary.html.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

A

Abandonment value  The value of a project if the project's assets were sold externally; or alternatively, its opportunity value if the assets were employed elsewhere in the firm. [Chapter 14]

ABC method of inventory control  Method that controls expensive inventory items more closely than less expensive items. [Chapter 10]

Absolute-priority rule  The rule in bankruptcy or reorganization that claims of a set of claim holders must be paid, or settled, in full before the next, junior, set of claim holders may be paid anything. [Chapter 23 Appendix]

Accelerated depreciation  Methods of depreciation that write off the cost of a capital asset faster than under straight-line depreciation. [Chapter 2]

Accounts receivable  Amounts of money owed to a firm by customers who have bought goods or services on credit. A current asset, the accounts receivable account is also called receivables. [Chapter 10]

Accrued expenses  Amounts owed but not yet paid for wages, taxes, interest, and dividends. The accrued expenses account is a short-term liability. [Chapter 11]

Acid-test (quick) ratio  Current assets less inventories divided by current liabilities. It shows a firm's ability to meet current liabilities with its most liquid (quick) assets. [Chapter 6]

Activity ratios  Ratios that measure how effectively the firm is using its assets. [Chapter 6]

Additional paid-in capital  Funds received by a company in a sale of common stock that are in excess of the par or stated value of the stock. [Chapter 20]

Adjusted beta  An estimate of a security's future beta that involves modifying the security's historical (measured) beta owing to the assumption that the security's beta has a tendency to move over time toward the average beta for the market or the company's industry. [Chapter 5]

Adjusted present value (APV)  The sum of the discounted value of a project's operating cash flows (assuming equity financing) plus the value of any tax-shield benefits of interest associated with the project's financing minus any flotation costs. [Chapter 15 Appendix B]

*Agency costs  Costs associated with monitoring management to ensure that it behaves in ways consistent with the firm's contractual agreements with creditors and shareholders. [Chapters 17 and 23]

Agency (theory)  A branch of economics relating to the behavior of principals (such as owners) and their agents (such as managers). [Chapter 1]

Agent(s)  Individual(s) authorized by another person, called the principal, to act in the latter's behalf. [Chapter 1]

Aging accounts receivable  The process of classifying accounts receivable by their age outstanding as of a given date. [Chapter 6]

Alternative minimum tax (AMT)  An alternative, separate tax calculation based on the taxpayer's regular taxable income, increased by certain tax benefits, collectively referred to as “tax preference items.” The taxpayer pays the larger of the regularly determined tax or the AMT. [Chapter 21]

Amortization schedule  A table showing the repayment schedule of interest and principal necessary to pay off a loan by maturity. [Chapter 3]

Annuity  A series of equal payments or receipts occurring over a specified number of periods. In an ordinary annuity, payments or receipts occur at the end of each period; in an annuity due, payments or receipts occur at the beginning of each period. [Chapter 3]

Arbitrage  Finding two assets that are essentially the same, buying the cheaper, and selling the more expensive. [Chapter 17]

Arbitrage pricing theory (APT)  A theory where the price of an asset depends on multiple factors and arbitrage efficiency prevails. [Chapter 5 Appendix B]

Arrearage  A late or overdue payment, which may be cumulative. [Chapter 20]

Asset-backed securities (ABS)  Debt securities whose interest and principal payments are provided by the cash flows coming from a discrete pool of assets. [Chapter 20]

Asset securitization  The process of packaging a pool of assets and then selling interests in the pool in the form of asset-backed securities (ABS). [Chapter 20]

Assigned (or stated) value  A nominal value assigned to a share of no-par common stock that is usually far below the actual issuing price. [Chapter 20]

Automated clearinghouse (ACH) electronic transfer  This is essentially an electronic version of the depository transfer check. [Chapter 9]

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B

B2B exchange  Business-to-business Internet marketplace that matches supply and demand by real-time auction bidding. [Chapter 10]

Balance sheet  A summary of a firm's financial position on a given date that shows total assets = total liabilities + owners' equity. [Chapter 6]

Balloon payment  A payment on debt that is much larger than other payments. The ultimate balloon payment is the entire principal at maturity. [Chapter 20]

*Bankers' acceptances (BAs)  Short-term promissory trade notes for which a bank (by having “accepted” them) promises to pay the holder the face amount at maturity. [Chapters 9 and 11]

Best efforts offering  A security offering in which the investment bankers agree to use only their best efforts to sell the issuer's securities. The investment bankers do not commit to purchase any unsold securities. [Chapter 19]

Beta  An index of systematic risk. It measures the sensitivity of a stock's returns to changes in returns on the market portfolio. The beta of a portfolio is simply a weighted average of the individual stock betas in the portfolio. [Chapter 5]

Bill of lading  A shipping document indicating the details of the shipment and delivery of goods and their ownership. [Chapter 24]

Blue sky laws  State laws regulating the offering and sale of securities. [Chapter 19]

*Bond  A long-term debt instrument issued by a corporation or government [Chapters 4 and 20]

Bond discount  The amount by which the face value of a bond exceeds its current price. [Chapter 4]

Bond premium  The amount by which the current price of a bond exceeds its face value. [Chapter 4]

Book value  (1) An asset: the accounting value of an asset – the asset's cost minus its accumulated depreciation; (2) a firm: total assets minus liabilities and preferred stock as listed on the balance sheet. [Chapter 4]

Break-even analysis  A technique for studying the relationship among fixed costs, variable costs, sales volume, and profits. It is also called cost/volume/profit (C/V/P) analysis. [Chapter 16]

Break-even chart  A graphic representation of the relationship between total revenues and total costs for various levels of production and sales, indicating areas of profit and loss. [Chapter 16]

Break-even point  The sales volume required so that total revenues and total costs are equal; may be expressed in units or in sales dollars. [Chapter 16]

Business risk  The inherent uncertainty in the physical operations of the firm. Its impact is shown in the variability of the firm's operating income (EBIT). [Chapter 16]

Business-to-business (B2B)  Communications and transactions conducted between businesses, as opposed to between businesses and end customers. Expressed in alphanumeric form (i.e., B2B), it refers to such transactions conducted over the Internet. [Chapter 10]

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C

Call option  A contract that gives the holder the right to purchase a specified quantity of the underlying asset at a predetermined price (the exercise price) on or before a fixed expiration date. [Chapter 22 Appendix]

Call premium  The excess of the call price of a security over its par value. [Chapter 20 Appendix]

Call price  The price at which a security with a call provision can be repurchased by the issuer prior to the security's maturity. [Chapter 20]

Call provision  A feature in an indenture that permits the issuer to repurchase securities at a fixed price (or a series of fixed prices) before maturity; also called call feature. [Chapter 20]

Capital-asset pricing model (CAPM)  A model that describes the relationship between risk and expected (required) return; in this model, a security's expected (required) return is the risk-free rate plus a premium based on the systematic risk of the security. [Chapter 5]

Capital budgeting  The process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year. [Chapter 12]

Capital gain (loss)  The amount by which the proceeds from the sale of a capital asset exceeds (is less than) the asset's original cost. [Chapter 2]

Capitalization rate  The discount rate used to determine the present value of a stream of expected future cash flows. [Chapter 17]

Capitalized expenditures  Expenditures that may provide benefits into the future and therefore are treated as capital outlays and not as expenses of the period in which they were incurred. [Chapter 12]

*Capital market  The market for relatively long-term (greater than one year original maturity) financial instruments (e.g., bonds and stocks). [Chapters 2 and 19]

Capital rationing  A situation where a constraint (or budget ceiling) is placed on the total size of capital expenditures during a particular period. [Chapter 13]

*Capital structure  The mix (or proportion) of a firm's permanent long-term financing represented by debt, preferred stock, and common stock equity. [Chapters 16 and 17]

Cash budget  A forecast of a firm's future cash flows arising from collections and disbursements, usually on a monthly basis. [Chapter 7]

Cash concentration  The movement of cash from lockbox or field banks into the firm's central cash pool residing in a concentration bank. [Chapter 9]

Cash cycle  The length of time from the actual outlay of cash for purchases until the collection of receivables resulting from the sale of goods or services; also called cash conversion cycle. [Chapter 6]

Cash discount  A percentage (%) reduction in sales or purchase price allowed for early payment of invoices. It is an incentive for credit customers to pay invoices in a timely fashion. [Chapter 10]

Cash discount period  The period of time during which a cash discount can be taken for early payment. [Chapter 10]

Cash dividend  Cash distribution of earnings to stockholders, usually on a quarterly basis. [Chapter 2]

Cash equivalents  Highly liquid, short-term marketable securities that are readily convertible to known amounts of cash and generally have remaining maturities of three months or less at the time of acquisition. [Chapter 6]

Cash insolvency  Inability to pay obligations as they fall due. [Chapter 16]

Certainty equivalent (CE)  The amount of cash someone would require with certainty at a point in time to make the individual indifferent between that certain amount and an amount expected to be received with risk at the same point in time. [Chapter 5]

Characteristic line  A line that describes the relationship between an individual security's returns and returns on the market portfolio. The slope of this line is beta. [Chapter 5]

Chattel mortgage  A lien on specifically identified personal property (assets other than real estate) backing a loan. [Chapter 11]

Clayton Act  A 1914 federal antitrust law designed to promote competition that addresses several antitrust matters, including interlocking directorates, race discrimination, exclusive dealing, and mergers. [Chapter 23]

Clearing House Interbank Payments System (CHIPS) An automated clearing system used primarily for international payments. The British counterpart is known as CHAPS. [Chapter 9]

*Coefficient of variation (CV)  The ratio of the standard deviation of a distribution to the mean of that distribution. It is a measure of relative risk. [Chapters 5 and 14]

*Commercial paper  Short-term, unsecured promissory notes, generally issued by large corporations (unsecured corporate IOUs). [Chapters 9 and 11]

*Commitment fee  A fee charged by the lender for agreeing to hold credit available. [Chapters 11 and 21]

Common-size analysis  An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income statement items are divided by net sales or revenues. [Chapter 6]

*Common stock  Securities that represent the ultimate ownership (and risk) position in a corporation. [Chapters 4 and 20]

*Compensating balance  Demand deposits maintained by a firm to compensate a bank for services provided, credit lines, or loans. [Chapters 9 and 11]

Compound interest  Interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent). [Chapter 3]

Conditional sales contract  A means of financing provided by the seller of equipment, who holds title to it until the financing is paid off. [Chapter 21]

Consol  A bond that never matures; a perpetuity in the form of a bond. [Chapter 4]

Consolidation  The combination of two or more firms into an entirely new firm. The old firms cease to exist. Though technically different, the terms merger (where one firm survives) and consolidation tend to be used interchangeably. [Chapter 23]

Controlled disbursement  A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total dollar amount of checks that will be presented against its account that day. [Chapter 9]

Conversion price  The price per share at which common stock will be exchanged for a convertible security. It is equal to the face value of the convertible security divided by the conversion ratio. [Chapter 22]

Conversion ratio  The number of shares of common stock into which a convertible security can be converted. It is equal to the face value of the convertible security divided by the conversion price. [Chapter 22]

Conversion value  The value of the convertible security in terms of the common stock into which the security can be converted. It is equal to the conversion ratio Verdana the current market price per share of the common stock. [Chapter 22]

*Convertible security  A bond or a preferred stock that is convertible into a specified number of shares of common stock at the option of the holder. [Chapters 20 and 22]

Corporate governance  The system by which corporations are managed and controlled. It encompasses the relationships among a company's shareholders, board of directors, and senior management. [Chapter 1]

Corporate restructuring  Any change in a company's capital structure, operations, or ownership that is outside its ordinary course of business. [Chapter 23]

Corporation  A business form legally separate from its owners. Its distinguishing features include limited liability, easy transfer of ownership, unlimited life, and an ability to raise large sums of capital. [Chapter 2]

*Correlation coefficient  A standardized statistical measure of the linear relationship between two variables. Its range is from -1.0 (perfect negative correlation), through 0 (no correlation), to +1.0 (perfect positive correlation). [Chapter 5 Appendix A and Chapter 14]

Cost of capital  The required rate of return on the various types of financing. The overall cost of capital is a weighted average of the individual required rates of return (costs). [Chapter 15]

Cost of debt (capital)  The required rate of return on investment of the lenders of a company. [Chapter 15]

Cost of equity capital  The required rate of return on investment of the common shareholders of the company. [Chapter 15]

Cost of goods sold  Product costs (inventoriable costs) that become period expenses only when the products are sold; equals beginning inventory plus cost of goods purchased or manufactured minus ending inventory. [Chapter 6]

Cost of preferred stock (capital)  The required rate of return on investment of the preferred shareholders of the company. [Chapter 15]

Countertrade  Generic term for barter and other forms of trade that involve the international sale of goods or services that are paid for – in whole or in part – by the transfer of goods or services from a foreign country. [Chapter 24]

*Coupon rate  The stated rate of interest on a bond; the annual interest payment divided by the bond's face value. [Chapters 4 and 20]

Covariance  A statistical measure of the degree to which two variables (e.g., securities' returns) move together. A positive value means that, on average, they move in the same direction. [Chapter 5]

*Covenant  A restriction on a borrower imposed by a lender: for example, the borrower must maintain a minimum amount of working capital. [Chapters 18 and 21]

*Coverage ratios  Ratios that relate the financial charges of a firm to its ability to service, or cover, them. [Chapters 6 and 16]

Credit period  The total length of time over which credit is extended to a customer to pay a bill. [Chapter 10]

Credit-scoring system  A system used to decide whether to grant credit by assigning numerical scores to various characteristics related to creditworthiness. [Chapter 10]

Credit standard  The minimum quality of creditworthiness of a credit applicant that is acceptable to the firm. [Chapter 10]

Cumulative dividends feature  A requirement that all cumulative unpaid dividends on the preferred stock be paid before a dividend may be paid on the common stock. [Chapter 20]

Cumulative voting  A method of electing corporate directors, where each common share held carries as many votes as there are directors to be elected and each shareholder may accumulate these votes and cast them in any fashion for one or more particular directors. [Chapter 20]

Currency option  A contract that gives the holder the right to buy (call) or sell (put) a specific amount of a foreign currency at some specified price until a certain (expiration) date. [Chapter 24]

Current ratio  Current assets divided by current liabilities. It shows a firm's ability to cover its current liabilities with its current assets. [Chapter 6]

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D

Debenture  A long-term, unsecured debt instrument. [Chapter 20]

Debt capacity  The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service. [Chapter 16]

Debt ratios  Ratios that show the extent to which the firm is financed by debt. [Chapter 6]

Debt-service burden  Cash required during a specific period, usually a year, to meet interest expenses and principal payments. Also called simply debt service. [Chapter 16]

Declaration date  The date that the board of directors announces the amount and date of the next dividend. [Chapter 18]

Declining-balance depreciation  Methods of depreciation calling for an annual charge based on a fixed percentage of the asset's depreciated book value at the beginning of the year for which the depreciation charge applies. [Chapter 2]

Default  The failure to meet the terms of a contract, such as failure to make interest or principal payments when due on a loan. [Chapter 2]

Deferred taxes  A “liability” that represents the accumulated difference between the income tax expense reported on the firm's books and the income tax actually paid. It arises principally because depreciation is calculated differently for financial reporting than for tax reporting. [Chapter 6 Appendix]

Degree of financial leverage (DFL)  The percentage change in a firm's earnings per share (EPS) resulting from a 1 percent change in operating profit (EBIT). [Chapter 16]

Degree of operating leverage (DOL)  The percentage change in a firm's operating profit (EBIT) resulting from a 1 percent change in output (sales). [Chapter 16]

Degree of total leverage (DTL)  The percentage change in a firm's earnings per share (EPS) resulting from a 1 percent change in output (sales). This is also equal to a firm's degree of operating leverage (DOL) Verdana its degree of financial leverage (DFL) at a particular level of output (sales). [Chapter 16]

Dependent (or contingent) project  A project whose acceptance depends on the acceptance of one or more other projects. [Chapter 13]

Depository transfer check (DTC)  A non-negotiable check payable to a single company account at a concentration bank. [Chapter 9]

Depreciable basis  In tax accounting, the fully installed cost of an asset. This is the amount that, by law, may be written off over time for tax purposes. [Chapter 12]

Depreciation  The systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both. [Chapter 2]

Derivative security  A financial contract whose value derives in part from the value and characteristics of one or more underlying assets (e.g., securities, commodities), interest rates, exchange rates, or indices. [Chapter 22]

*Dilution  A decrease in the proportional claim on earnings and assets of a share of common stock because of the issuance of additional shares. [Chapters 18 and 22]

Disbursement float  Total time between the mailing of a check by a firm and the check's clearing the firm's checking account. [Chapter 9]

Discounted cash flow (DCF)  Any method of investment project evaluation and selection that adjusts cash flows over time for the time value of money. [Chapter 13]

Discount rate (capitalization rate)  Interest rate used to convert future values to present values. [Chapter 3]

Divestiture  The divestment of a portion of the enterprise or the firm as a whole. [Chapter 23]

*Dividend-payout ratio  Annual cash dividends divided by annual earnings; or alternatively, dividends per share divided by earnings per share. The ratio indicates the percentage of a company's earnings that is paid out to shareholders in cash. [Chapters 2 and 18]

Dividend reinvestment plan (DRIP)  An optional plan allowing shareholders to automatically reinvest dividend payments in additional shares of the company's stock. [Chapter 18]

Dividend yield  Anticipated annual dividend divided by the market price of the stock. [Chapter 18]

Dot-com  A company with a strong Internet presence that conducts much or all of its business through its web site. The name itself refers to the period (dot) followed by the abbreviation of the commercial domain (.com) at the end of an e-mail or Web address; also called dotcom or dot.com. [Chapter 7]

Double taxation  Taxation of the same income twice. A classic example is taxation of income at the corporate level and again as dividend income when received by the shareholder. [Chapter 2]

Draft  A signed, written order by which the first party (drawer) instructs a second party (drawee) to pay a specified amount of money to a third party (payee). The drawer and payee are often one and the same. [Chapter 11]

Dual-class common stock  Two classes of common stock, usually designated Class A and Class B. Class A is usually the weaker voting or nonvoting class, and Class B is usually the stronger. [Chapter 20]

Dutch auction  A procedure for buying (selling) securities named for a system used for flower auctions in Holland. A buyer (seller) seeks bids within a specified price range, usually for a large block of stock or bonds. After evaluating the range of bid prices received, the buyer (seller) accepts the lowest price that will allow it to acquire (dispose of) the entire block. [Chapter 18]

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E

Earnings per share (EPS)  Earnings after taxes (EAT) divided by the number of common shares outstanding. [Chapter 1]

EBIT-EPS break-even analysis  Analysis of the effect of financing alternatives on earnings per share. The break-even point is the EBIT level where EPS is the same for two (or more) alternatives. [Chapter 16]

Economic order quantity (EOQ)  The quantity of an inventory item to order so that total inventory costs are minimized over the firm's planning period. [Chapter 10]

Economic value added (EVA)  A measure of business performance. It is a type of economic profit that is equal to a company's after-tax net operating profit minus a dollar cost of capital charge (and possibly including some adjustments). [Chapter 15]

Economies of scale  The benefits of size in which the average unit cost falls as volume increases. [Chapter 23]

Effective annual interest rate  The actual rate of interest earned (paid) after adjusting the nominal rate for factors such as the number of compounding periods per year. [Chapter 3]

Efficient financial market  A financial market in which current prices fully reflect all available relevant information. [Chapter 5]

Electronic commerce (EC)  The exchange of business information in an electronic (nonpaper) format, including over the Internet. [Chapter 9]

Electronic data interchange (EDI)  The movement of business data electronically in a structured, computer readable format. [Chapter 9]

Electronic funds transfer (EFT)  The electronic movements of information between two depository institutions resulting in a value (money) transfer. [Chapter 9]

Electronic lockbox  A collection service provided by a firm's bank that receives electronic payments and accompanying remittance data and communicates this information to the company in a specified format. [Chapter 9]

Equipment trust certificate  An intermediate- to long-term security, usually issued by a transportation company, such as a railroad or airline, that is used to finance new equipment. [Chapter 20]

Equity carve-out  The public sale of stock in a subsidiary in which the parent usually retains majority control. [Chapter 23]

Euro (EUR)  The name given to the single European currency. Its official abbreviation is EUR. Like the dollar ($) and the British pound (£), the euro (a) has a distinctive symbol, which looks similar to a “C” with a “=” through it. [Chapter 24]

Eurobond  A bond issue sold internationally outside the country in whose currency the bond is denominated. [Chapter 24]

Eurocurrency  A currency deposited outside its country of origin. [Chapter 24]

*Eurodollars  A US dollar-denominated deposit – generally in a bank located outside the United States – not subject to US banking regulations. [Chapters 9 and 24]

Euro medium-term note (Euro MTN)  An MTN issue sold internationally outside the country in whose currency the MTN is denominated. [Chapter 21]

Event risk  The risk that existing debt will suffer a decline in creditworthiness because of the issuance of additional debt securities, usually in connection with corporate restructurings. [Chapter 19]

Exchangeable bond  A bond that allows the holder to exchange the security for common stock of another company – generally, one in which the bond issuer has an ownership interest. [Chapter 22]

Exchange rate  The number of units of one currency that may be purchased with one unit of another currency. [Chapter 24]

Ex-dividend date  The first date on which a stock purchaser is no longer entitled to the recently declared dividend. [Chapter 18]

Exercise price  The price at which the common stock associated with a warrant or call option can be purchased over a specified period. [Chapter 22]

Expected return  The weighted average of possible returns, with the weights being the probabilities of occurrence. [Chapter 5]

Expected value  The weighted average of possible outcomes, with the weights being the probabilities of occurrence. [Chapter 14]

Ex-rights date  The first date on which a stock purchaser no longer receives the right to subscribe to additional shares through the recently announced rights offering. [Chapter 19]

Extra dividend  A nonrecurring dividend paid to shareholders in addition to the regular dividend. It is brought about by special circumstances. [Chapter 18]

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F

Face value  The stated value of an asset. In the case of a bond, the face value is usually $1,000. [Chapter 4]

Factoring  The selling of receivables to a financial insti­tution, the factor, usually “without recourse.” [Chapter 11]

Fair market value  The price at which property can be sold in an arm's length transaction. [Chapter 21]

FASB 13  Statement issued by the Financial Accounting Standards Board (FASB) establishing financial accounting standards for lessees and lessors. [Chapter 21 Appendix]

Federal agency  An executive department, an independent federal establishment, a corporation, or other entity established by Congress that is owned in whole or in part by the United States. [Chapter 9]

Field warehouse receipt  A receipt for goods segregated and stored on the borrower's premises (but under the control of an independent warehousing company) that a lender holds as collateral for a loan. [Chapter 11]

Financial Accounting Standards Board (FASB)  The rule-making body of the accounting profession that sets its standards. [Chapter 24]

Financial EDI (FEDI)  The movement of financially related electronic information between a company and its bank or between banks. [Chapter 9]

*Financial intermediaries  Financial institutions that accept money from savers and use those funds to make loans and other financial investments in their own name. They include commercial banks, savings institutions, insurance companies, pension funds, finance companies, and mutual funds. [Chapters 2 and 19]

Financial lease  A long-term lease that is not cancellable. [Chapter 21]

Financial leverage  The use of fixed financing costs by the firm. The British expression is gearing. [Chapter 16]

Financial management  Concerns the acquisition, financing, and management of assets with some overall goal in mind. [Chapter 1]

*Financial markets  All institutions and procedures for bringing buyers and sellers of financial instruments together. [Chapters 2 and 19]

Financial ratio  An index that relates two accounting numbers and is obtained by dividing one number by the other. [Chapter 6]

Financial risk  The added variability in earnings per share (EPS) – plus the risk of possible insolvency – that is induced by the use of financial leverage. [Chapter 16]

Financial (statement) analysis  The art of transforming data from financial statements into information that is useful for informed decision making. [Chapter 6]

Floating lien  A general, or blanket, lien against a group of assets, such as inventory or receivables, without the assets being specifically identified. [Chapter 11]

Floating-rate note (FRN)  Debt issue with a variable interest rate. [Chapter 24]

*Flotation costs  The costs associated with issuing securities, such as underwriting, legal, listing, and printing fees. [Chapters 15 and 18]

Flow of funds statement  A summary of a firm's changes in financial position from one period to another; it is also called a sources and uses of funds statement or a statement of changes in financial position. [Chapter 7]

Forecast financial statements  Expected future financial statements based on conditions that management expects to exist and actions it expects to take. [Chapter 7]

Forfaiting  The selling “without recourse” of medium- to long-term export receivables to a financial institution, the forfaiter. A third party, usually a bank or governmental unit, guarantees the financing. [Chapter 24]

Forward contract  A contract for the delivery of a commodity, foreign currency, or financial instrument at a price specified now, with delivery and settlement at a specified future date. Although similar to a futures contract, it is not easily transferred or canceled. [Chapter 24]

Forward exchange rate  The rate today for exchanging one currency for another at a specific future date. [Chapter 24]

Futures contract  A contract for the delivery of a commodity, foreign currency, or financial instrument at a specified price on a stipulated future date. Futures contracts are traded on organized exchanges. [Chapter 24]

Future value (terminal value)  The value at some future time of a present amount of money, or a series of payments, evaluated at a given interest rate. [Chapter 3]

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G

General partner  Member of a partnership with unlimited liability for the debts of the partnership. [Chapter 2]

Going-concern value  The amount a firm could be sold for as a continuing operating business. [Chapter 4]

Going private  Making a public company private through the repurchase of stock by current management and/or outside private investors. [Chapter 23]

Goodwill  The intangible assets of the acquired firm arising from the acquiring firm paying more for them than their book value. Goodwill must be tested at least once a year for impairment (or decline). [Chapter 23]

Gross working capital  The firm's investment in current assets (such as cash and marketable securities, receivables, and inventory). [Chapter 8]

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H

Hedge  (noun) Something that reduces the risk of future price movements. [Chapter 22]

*Hedging (maturity matching) approach  A method of financing where each asset would be offset with a financing instrument of the same approximate maturity. [Chapters 8 and 15]

Hurdle rate  The minimum required rate of return on an investment in a discounted cash flow analysis; the rate at which a project is acceptable. [Chapter 13]

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I

Income bond  A bond where the payment of interest is contingent on sufficient earnings of the firm. [Chapter 20]

Income statement  A summary of a firm's revenues and expenses over a specified period, ending with net income or loss for the period. [Chapter 6]

Indenture  The legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders, establishing the terms of the bond issue and naming the trustee. [Chapter 20]

Independent project  A project whose acceptance (or rejection) does not prevent the acceptance of other projects under consideration. [Chapter 13]

Index analysis  An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent) and subsequent financial statement items are expressed as percentages of their values in the base year. [Chapter 6]

Indifference curve  A line representing all combinations of expected return and risk that provide an investor with an equal amount of satisfaction. [Chapter 15]

Indifference point  (EBIT-EPS indifference point) The level of EBIT that produces the same level of EPS for two (or more) alternative capital structures. [Chapter 16]

Inflation  A rise in the average level of prices of goods and services. [Chapter 2]

*Initial public offering (IPO)  A company's first offering of common stock to the general public. [Chapters 19 and 23]

Interest  Money paid (earned) for the use of money. [Chapter 3]

*Interest coverage ratio  Earnings before interest and taxes divided by interest charges. It indicates a firm's ability to cover interest charges. It is also called Verdana interest earned. [Chapters 6 and 16]

*Interest-rate (or yield) risk  The variability in the market price of a security caused by changes in interest rates. [Chapters 4 and 9]

Internal rate of return (IRR)  The discount rate that equates the present value of the future net cash flows from an investment project with the project's initial cash outflow. [Chapter 13]

*Interpolate  Estimate an unknown number that lies some­where between two known numbers. [Chapters 4 and 13]

Intrinsic value  The price a security “ought to have” based on all factors bearing on valuation. [Chapter 4]

*Investment banker  A financial institution that underwrites (purchases at a fixed price on a fixed date) new securities for resale. [Chapters 2 and 19]

Invoice  Bill prepared by a seller of goods or services and submitted to the purchaser. It lists the items bought, prices, and terms of sale. [Chapter 9]

IPO roll-up  An initial public offering (IPO) of independent companies in the same industry that merge into a single company concurrent with the stock offering. The funds from the IPO are used to finance the acquisition of the combining companies. [Chapter 23]

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J

Joint venture  A business venture jointly owned and controlled by two or more independent firms. Each venture partner continues to exist as a separate firm, and the joint venture represents a new business enterprise. [Chapter 23]

Junk bond  A high-risk, high-yield (often unsecured) bond rated below investment grade. [Chapter 20]

Just-in-time (JIT)  An approach to inventory management and control in which inventories are acquired and inserted in production at the exact Verdana they are needed. [Chapter 10]

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L

Lead time  The length of time between the placement of an order for an inventory item and when the item is received in inventory. [Chapter 10]

Lease  A contract under which one party, the lessor (owner) of an asset, agrees to grant the use of that asset to another, the lessee, in exchange for periodic rental payments. [Chapter 21]

*Letter of credit (L/C)  A promise from a third party (usually a bank) for payment in the event that certain conditions are met. It is frequently used to guarantee payment of an obligation. [Chapters 11 and 24]

Letter stock  Privately placed common stock that cannot be immediately resold. [Chapter 19]

Leverage  The use of fixed costs in an attempt to increase (or lever up) profitability. [Chapter 16]

Leveraged buyout (LBO)  A primarily debt-financed purchase of all the stock or assets of a company, subsidiary, or division by an investor group. [Chapter 23]

Leveraged leasing  A lease arrangement in which the lessor provides an equity portion (usually 20 to 40 percent) of the leased asset's cost and third-party lenders provide the balance of the financing. [Chapter 21]

Lien  A legal claim on certain assets. A lien can be used to secure a loan. [Chapter 21]

Limited liability company (LLC)  A business form that provides its owners (called “members”) with corporate-style limited personal liability and the federal-tax treatment of a partnership. [Chapter 2]

Limited partner  Member of a limited partnership not personally liable for the debts of the partnership. [Chapter 2]

Line of credit  A limit to the amount of credit extended to an account. Purchaser can buy on credit up to that limit. [Chapter 10]

Line of credit (with a bank)  An informal arrangement between a bank and its customer specifying the maximum amount of credit the bank will permit the firm to owe at any one time. [Chapter 11]

Liquidation  The sale of assets of a firm, either voluntarily or in bankruptcy. [Chapter 23]

Liquidation value  The amount of money that could be realized if an asset or a group of assets (e.g., a firm) is sold separately from its operating organization. [Chapter 4]

Liquidity  The ability of an asset to be converted into cash without a significant price concession. [Chapter 6]

Liquidity ratios  Ratios that measure a firm's ability to meet short-term obligations. [Chapter 6]

Listing  Admission of a security for trading on an organized exchange. A security so admitted is referred to as a listed security. [Chapter 20]

Loan agreement  A legal agreement specifying the terms of a loan and the obligations of the borrower. [Chapter 21]

Lockbox  A post office box maintained by a firm's bank that is used as a receiving point for customer remittances. Retail lockbox systems cater to the receipt and processing of low- to moderate-dollar, high-volume remittances, whereas wholesale lockbox systems are designed to handle high-dollar, low-volume remittances. [Chapter 9]

*London interbank offered rate (LIBOR)  The interest rate that world-class banks in London pay each other for Eurodollars. [Chapters 11 and 24]

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M

Majority-rule voting  A method of electing corporate directors, where each common share held carries one vote for each director position that is open; also called statutory voting. [Chapter 20]

Management buyout (MBO)  A leveraged buyout (LBO) in which pre-buyout management ends up with a substantial equity position. [Chapter 23]

Managerial (real) option  Management flexibility to make future decisions that affect a project's expected cash flows, life, or future acceptance. [Chapter 14]

*Marketability (or liquidity)  The ability to sell a significant volume of securities in a short period of time in the secondary market without significant price concession. [Chapters 2 and 9]

Market value  The market price at which an asset trades. [Chapter 4]

*Maturity  The life of a security; the amount of time before the principal amount of a security becomes due. [Chapters 2 and 9]

Medium-term note (MTN)  A corporate or government debt instrument that is offered to investors on a continuous basis. Maturities range from nine months to 30 years (or more). [Chapter 21]

Merger  The combination of two or more companies in which only one firm survives as a legal entity. [Chapter 23]

Money market  The market for short-term (less than one year original maturity) government and corporate debt securities. It also includes government securities originally issued with maturities of more than one year but that now have a year or less until maturity. [Chapter 2]

Money market instruments  (Broadly defined). All government securities and short-term corporate obligations. [Chapter 9]

*Money market mutual funds (MMFs)  Mutual funds that utilize pools of investors' funds to invest in large-denomination money market instruments. [Chapters 9 and 20]

Money market preferred stock (MMP)  Preferred stock having a dividend rate that is reset at auction every 49 days. [Chapter 9]

Mortgage banker  A financial institution that originates (buys) mortgages primarily for resale. [Chapter 2]

Mortgage bond  A bond issue secured by a mortgage on the issuer's property. [Chapter 20]

Multinational company  A company that does business and has assets in two or more countries. [Chapter 24]

Mutually exclusive project  A project whose acceptance precludes the acceptance of one or more alternative projects. [Chapter 13]

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N

Natural hedge  A hedge (risk reduction action) that occurs naturally as a result of a firm's normal operations. For example, revenue received in a foreign currency and used to pay commitments in the same foreign currency would constitute a natural hedge. [Chapter 24]

Negative pledge clause  A protective covenant whereby the borrower agrees not to allow a lien on any of its assets. [Chapter 21]

Negotiable certificate of deposit (CD)  A large denomination investment in a negotiable time deposit at a commercial bank or savings institution paying a fixed or variable rate of interest for a specified time period. [Chapter 9]

Net float  The dollar difference between the balance shown in a firm's (or individual's) checkbook balance and the balance on the bank's books. [Chapter 9]

Net lease  A lease where the lessee maintains and insures the leased asset. [Chapter 21]

Net operating income (NOI) approach (to capital structure)  A theory of capital structure in which the weighted average cost of capital and the total value of the firm remain constant as financial leverage is changed. [Chapter 17]

Net operating profit after tax (NOPAT)  A company's potential after-tax net profit if it was all-equity-financed or “unlevered.” [Chapter 15]

Net present value (NPV)  The present value of an investment project's net cash flows minus the project's initial cash outflow. [Chapter 13]

Netting  System in which cross-border purchases among participating subsidiaries of the same company are netted so that each participant pays or receives only the net amount of its intracompany purchases and sales. [Chapter 24]

Net working capital  Current assets minus current liabilities. [Chapter 8]

Nominal (stated) interest rate  A rate of interest quoted for a year that has not been adjusted for frequency of compounding. If interest is compounded more than once a year, the effective interest rate will be higher than the nominal rate. [Chapter 3]

North American Industry Classification System (NAICS, pronounced “nakes”) Codes  A standardized classification of businesses by types of economic activity developed jointly by Canada, Mexico, and the United States. A five- or six-digit code number is assigned depending on how a business is defined. [Chapter 15]

NPV profile  A graph showing the relationship between a project's net present value and the discount rate employed. [Chapter 13]

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O

Operating cycle  The length of time from the commitment of cash for purchases until the collection of receivables resulting from the sale of goods or services. [Chapter 6]

Operating lease  A short-term lease that is often cancellable. [Chapter 21]

Operating leverage  The use of fixed operating costs by the firm. [Chapter 16]

Opportunity cost  What is lost by not taking the next-best investment alternative. [Chapter 12]

Optimal capital structure  The capital structure that minimizes the firm's cost of capital and thereby maximizes the value of the firm. [Chapter 17]

Order point  The quantity to which inventory must fall in order to signal that an order must be placed to replenish an item. [Chapter 10]

*Outsourcing  Subcontracting a certain business operation to an outside firm instead of doing it in house. [Chapters 9 and 23]

Oversubscription privilege  The right to purchase, on a pro rata basis, any unsubscribed shares in a rights offering. [Chapter 19]

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P

Participating preferred stock  Preferred stock where the holder is allowed to participate in increasing dividends if the common stockholders receive increasing dividends. [Chapter 20]

Partnership  A business form in which two or more individuals act as owners. In a general partnership all partners have unlimited liability for the debts of the firm; in a limited partnership one or more partners may have limited liability. [Chapter 2]

Par value  The face value of a stock or bond. [Chapter 20]

Payable through draft (PTD)  A check-like instrument that is drawn against the payor and not against a bank, as is a check. After a PTD is presented to a bank, the payor gets to decide whether to honor or refuse payment. [Chapter 9]

Payback period (PBP)  The period of time required for the cumulative expected cash flows from an investment project to equal the initial cash outflow. [Chapter 13]

Payment date  The date when the corporation actually pays the declared dividend. [Chapter 18]

Permanent working capital  The amount of current assets required to meet a firm's long-term minimum needs. [Chapter 8]

Perpetuity  An ordinary annuity whose payments or receipts continue forever. [Chapter 3]

Poison pill  A device used by a company to make itself less attractive as a takeover candidate. Its poison, so to speak, is released when the buyer takes a sufficient bite of the target firm. [Chapter 23]

Pooling of interests (method)  A method of accounting treatment for a merger based on the net book value of the acquired company's assets. The balance sheets of the two companies are simply combined. [Chapter 23]

Portfolio  A combination of two or more securities or assets. [Chapter 5]

Post-completion audit  A formal comparison of the actual costs and benefits of a project with original estimates. A key element of the audit is feedback: that is, results of the audit are given to relevant personnel so that future decision making can be improved. [Chapter 13]

Preauthorized debit  The transfer of funds from a payor's bank account on a specified date to the payee's bank account; the transfer is initiated by the payee with the payor's advance authorization. [Chapter 9]

Preemptive right  The privilege of shareholders to maintain their proportional company ownership by purchasing a proportionate share of any new issue of common stock, or securities convertible into common stock. [Chapter 19]

*Preferred stock  A type of stock that promises a (usually) fixed dividend but at the discretion of the board of directors. It has preference over common stock in the payment of dividends and claims on assets. [Chapters 4 and 20]

Premium over conversion value  The market price of a convertible security minus its conversion value; also called conversion premium. [Chapter 22]

Premium over straight bond value  Market price of a convertible bond minus its straight bond value. [Chapter 22]

Prepackaged bankruptcy (prepack)  A reorganization that a majority of a company's creditors have approved prior to the beginning of a bankruptcy proceeding. [Chapter 23]

Present value  The current value of a future amount of money, or a series of payments, evaluated at a given interest rate. [Chapter 3]

Price/earnings (P/E) ratio  The market price per share of a firm's common stock divided by the most recent 12 months of earnings per share; also known as a trailing P/E ratio. [Chapter 20]

*Primary market  A market where new securities are bought and sold for the first time (a “new issues” market). [Chapters 2 and 19]

Prime rate  Short-term interest rate charged by banks to large, creditworthy customers. It is also called simply prime. [Chapter 11]

Private (or direct) placement  The sale of an entire issue of unregistered securities (usually bonds) directly to one purchaser or a group of purchasers (usually financial intermediaries). [Chapter 19]

Privileged subscription  The sale of new securities in which existing shareholders are given a preference in purchasing these securities up to the proportion of common shares that they already own; also known as a rights offering. [Chapter 19]

Probability distribution  A set of possible values that a random variable can assume and their associated probabilities of occurrence. [Chapter 5]

Probability tree  A graphic or tabular approach for organizing the possible cash-flow streams generated by an investment. The presentation resembles the branches of a tree. Each complete branch represents one possible cash-flow sequence. [Chapter 14]

Profitability index (PI)  The ratio of the present value of a project's future net cash flows to the project's initial cash outflow. [Chapter 13]

Profitability ratios  Ratios that relate profits to sales and investment. [Chapter 6]

Profit maximization  Maximizing a firm's earnings after taxes (EAT). [Chapter 1]

Promissory note  A legal promise to pay a sum of money to a lender. [Chapter 21]

Prospectus  Part I of the registration statement filed with the SEC. It discloses information about the issuing company and its new offering and is distributed as a separate booklet to investors. [Chapter 19]

Proxy  A legal document giving one person the authority to act for another. In business, it generally refers to the instructions given by a shareholder with regard to voting shares of common stock. [Chapter 20]

Public Company Accounting Oversight Board (PCAOB)  Private-sector, nonprofit corporation, created by the Sarbanes-Oxley Act of 2002 to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports. [Chapter 1]

Public issue  Sale of bonds or stock to the general public. [Chapter 19]

Purchase (method)  A method of accounting treatment for a merger based on the market price paid for the acquired company. [Chapter 23]

Purchasing-power parity (PPP)  The idea that a basket of goods should sell for the same price in two countries, after exchange rates are taken into account. [Chapter 24]

Pure play  An investment concentrated in one line of business. The extreme opposite of a pure play would be an investment in a conglomerate. [Chapter 23]

Put option  A contract that gives the holder the right to sell a specified quantity of the underlying asset at a predetermined price (the exercise price) on or before a fixed expiration date. [Chapter 22 Appendix]

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R

Recapitalization  An alteration of a firm's capital structure. For example, a firm may sell bonds to acquire the cash necessary to repurchase some of its outstanding common stock. [Chapter 17]

Record date  The date, set by the board of directors when a dividend is declared, on which an investor must be a shareholder of record to be entitled to the upcoming dividend. [Chapter 18]

Red herring  The preliminary prospectus. It includes a legend in red ink on the cover stating that the registration statement has not yet become effective. [Chapter 19]

Refunding  Replacing an old debt issue with a new one, usually to lower the interest cost. [Chapter 20 Appendix]

Registration statement  The disclosure document filed with the SEC to register a new securities issue. The registration statement includes the prospectus and other information required by the SEC. [Chapter 19]

Regular dividend  The dividend that is normally expected to be paid by the firm. [Chapter 18]

Reinvoicing center  A company-owned financial subsidiary that purchases exported goods from company affiliates and resells (reinvoices) them to other affiliates or independent customers. [Chapter 24]

Remote disbursement  A system in which the firm directs checks to be drawn on a bank that is geographically remote from its customer so as to maximize check-clearing time. [Chapter 9]

Reorganization  Recasting of the capital structure of a financially troubled company, under Chapter 11 of the Bankruptcy Act, to reduce fixed charges. Claim holders may be given substitute securities. [Chapter 23 Appendix]

Repurchase agreements (RPs; repos)  Agreements to buy securities (usually Treasury bills) and to resell them at a specified higher price at a later date. [Chapter 9]

Residual value  The value of a leased asset at the end of the lease period. [Chapter 21]

Return  Income received on an investment plus any change in market price, usually expressed as a percentage of the beginning market price of the investment. [Chapter 5]

Reverse stock split   A stock split in which the number of shares outstanding is decreased; for example, a 1-for-2 reverse stock split where each shareholder receives one new share in exchange for every two old shares held. [Chapter 18]

*Revolving credit agreement  A formal, legal commitment to extend credit up to some maximum amount over a stated period of time. [Chapters 11 and 21]

Right  A short-term option to buy a certain number (or fraction) of securities from the issuing corporation; also called a subscription right. [Chapter 19]

Risk  The variability of returns from those that are expected. [Chapter 5]

Risk-adjusted discount rate (RADR)  A required return (discount rate) that is increased relative to the firm's overall cost of capital for projects or groups showing greater than “average” risk and decreased for projects or groups showing less than “average” risk. [Chapter 15]

Risk averse  Term applied to an investor who demands a higher expected return, the higher the risk. [Chapter 5]

Roll-up  The combining of multiple small companies in the same industry to create one larger company. [Chapter 23]

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Safety (of principal)  Refers to the likelihood of getting back the same number of dollars you originally invested (principal). [Chapter 9]

Safety stock  Inventory stock held in reserve as a cushion against uncertain demand (or usage) and replenishment lead time. [Chapter 10]

Sale and leaseback  The sale of an asset with the agreement to immediately lease it back for an extended period of time. [Chapter 21]

*Sarbanes-Oxley Act of 2002 (SOX)  Addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. [Chapters 1 and 19]

Seasonal dating  Credit terms that encourage the buyer of seasonal products to take delivery before the peak sales period and to defer payment until after the peak sales period. [Chapter 10]

*Secondary market  A market for existing (used) securities rather than new issues. [Chapters 2 and 19]

Secured loans  A form of debt for money borrowed in which specific assets have been pledged to guarantee payment. [Chapter 11]

Securities Act of 1933 (1933 Act)  Generally requires that public offerings be registered with the federal government before they may be sold; also known as the Truth in Securities Act. [Chapter 19]

Securities and Exchange Commission (SEC)  The US government agency responsible for administration of federal securities laws, including the 1933 and 1934 Acts. [Chapter 19]

Securities Exchange Act of 1934 (1934 Act)  Regulates the secondary market for long-term securities – the securities exchanges and the over-the-counter market. [Chapter 19]

Security (collateral)  Asset(s) pledged by a borrower to ensure repayment of a loan. If the borrower defaults, the lender may sell the security to pay off the loan. [Chapter 11]

Security market line (SML)  A line that describes the linear relationship between expected rates of return for individual securities (and portfolios) and systematic risk, as measured by beta. [Chapter 5]

Self-tender offer  An offer by a firm to repurchase some of its own shares. [Chapter 18]

Sell-off  The sale of a division of a company, known as a partial sell-off, or the company as a whole, known as a voluntary liquidation. [Chapter 23]

Sensitivity analysis  Type of “what if” uncertainty analysis in which variables or assumptions are changed from a base case in order to determine their impact on a project's measured results, such as net present value (NPV) or internal rate of return (IRR). [Chapter 13]

Serial bonds  An issue of bonds with different maturities, as distinguished from an issue where all the bonds have identical maturities (term bonds). [Chapter 20]

Shareholders' equity  Total assets minus total liabilities. Alternatively, the book value of a company's common stock (at par) plus additional paid-in capital and retained earnings. [Chapter 6]

Shark repellent  Defenses employed by a company to ward off potential takeover bidders – the “sharks.” [Chapter 23]

Shelf registration  A procedure whereby a company is permitted to register securities it plans to sell over the next two years; also called SEC Rule 415. These securities can then be sold piecemeal whenever the company chooses. [Chapter 19]

Simple interest  Interest paid (earned) on only the original amount, or principal, borrowed (lent). [Chapter 3]

Sinking fund  Fund established to periodically retire a portion of a security issue before maturity. The corporation is required to make periodic sinking-fund payments to a trustee. [Chapter 20]

Society for Worldwide Interbank Financial Telecommunication (SWIFT)  The major international financial telecommunications network that transmits international payment instructions as well as other financial messages. [Chapter 9]

Sole proprietorship  A business form for which there is one owner. This single owner has unlimited liability for all debts of the firm. [Chapter 2]

Spin-off  A form of divestiture resulting in a subsidiary or division becoming an independent company. Ordinarily, shares in the new company are distributed to the parent company's shareholders on a pro rata basis. [Chapter 23]

Spontaneous financing  Trade credit, and other payables and accruals that arise spontaneously in the firm's day-to-day operations. [Chapter 8]

Spot exchange rate  The rate today for exchanging one currency for another for immediate delivery. [Chapter 24]

Stakeholders  All constituencies with a stake in the fortunes of the company. They include shareholders, creditors, customers, employees, suppliers, and local communities. [Chapter 1]

Standard & Poor's 500 Stock Index (S&P 500 Index)   A market-value-weighted index of 500 large capitalization common stocks selected from a broad cross section of industry groups. It is used as a mea­sure of overall market performance. [Chapter 5]

*Standard deviation  A statistical measure of the variability of a distribution around its mean. It is the square root of the variance. [Chapters 5 and 14]

Standby arrangement  A measure taken to ensure the complete success of a rights offering in which an investment banker or group of investment bankers agrees to “stand by” to underwrite any unsubscribed (unsold) portion of the issue. [Chapter 19]

Statement of cash flows  A summary of a firm's cash receipts and cash payments during a period of time. [Chapter 7]

Statement of retained earnings  A financial statement summarizing the changes in retained earnings for a stated period – resulting from earnings (or losses) and dividends paid. This statement is often combined with the income statement. [Chapter 6]

Stock dividend  A payment of additional shares of stock to shareholders. Often used in place of or in addition to a cash dividend. [Chapter 18]

Stockout  Not having enough items in inventory to fill an order. [Chapter 6]

Stock repurchase  The repurchase (buyback) of stock by the issuing firm, either in the open (secondary) market or by self-tender offer. [Chapter 18]

Stock split  An increase in the number of shares outstanding by reducing the par value of the stock; for example, a 2-for-1 stock split where par value per share is reduced by one-half. [Chapter 18]

Straight bond value  The value of a convertible bond if the convertible feature were valueless; in other words, the value of a nonconvertible bond with the same coupon rate, maturity, and default risk as the convertible bond. [Chapter 22]

Straight debt (or equity)  Debt (or equity) that cannot be exchanged for another asset. [Chapter 22]

Straight-line depreciation  A method of depreciation that allocates expenses evenly over the depreciable life of the asset. [Chapter 2]

Strategic alliance  An agreement between two or more independent firms to cooperate in order to achieve some specific commercial objective. [Chapter 23]

Stretching accounts payable  Postponing payment of the amount due to suppliers beyond the end of the net (credit) period; also called leaning on the trade. [Chapter 11]

Subordinated debenture  A long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt; known as junior debt. [Chapter 20]

Subsidiary  A company that has more than half of its voting shares owned by another company (the parent company). [Chapter 15]

Sunk costs  Unrecoverable past outlays that, because they cannot be recovered, should not affect present actions or future decisions. [Chapter 12]

Supply chain management (SCM)  Managing the process of moving goods, services, and information from suppliers to end customers. [Chapter 10]

Synergy  Economies realized in a merger where the performance of the combined firm exceeds that of its previously separate parts. [Chapter 23]

Systematic risk  The variability of return on stocks or portfolios associated with changes in return on the market as a whole. [Chapter 5]

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Takeover  The acquisition of another company that may (from the viewpoint of the acquired firm's management) take the form of a “friendly” or “unfriendly” merger. [Chapter 23]

*Tax shield  A tax-deductible expense. The expense protects (shields) an equivalent dollar amount of revenue from being taxed by reducing taxable income. [Chapter 15 Appendix B and Chapter 17]

Temporary working capital  The amount of current assets that varies with seasonal requirements. [Chapter 8]

Tender offer  An offer to buy current shareholders' stock at a specified price, often with the objective of gaining control of the company. The offer is often made by another company and usually for more than the present market price. [Chapter 23]

Terminal warehouse receipt  A receipt for the deposit of goods in a public warehouse that a lender holds as collateral for a loan. [Chapter 11]

Term loan  Debt originally scheduled for repayment in more than 1 year, but generally in less than 10 years. [Chapter 21]

Term structure of interest rates  The relationship between yield and maturity for securities differing only in the length of time (or term) to maturity. [Chapter 2]

*Ticker symbol  A unique, letter-character code name assigned to securities and mutual funds. It is often used in newspapers and price-quotation services. This shorthand method of identification was originally developed in the nineteenth century by telegraph operators. [Chapters 5 and 23]

Tombstone advertisement  An announcement placed in newspapers and magazines giving just the most basic details of a security offering. The term reflects the stark, black-bordered look of the ad. [Chapter 19]

Total firm risk  The variability in earnings per share (EPS). It is the sum of business plus financial risk. [Chapter 16]

Total (or combined) leverage  The use of both fixed operating and financing costs by the firm. [Chapter 16]

Trade credit  Credit granted from one business to another. [Chapter 11]

Trade liabilities  Money owed to suppliers. [Chapter 11]

Traditional approach (to capital structure)  A theory of capital structure in which there exists an optimal capital structure and where management can increase the total value of the firm through the judicious use of financial leverage. [Chapter 17]

Translation gain or loss  An accounting gain or loss arising from the translation of the assets and liabilities of a foreign subsidiary into the parent company's currency. [Chapter 24]

Treasury bills (T-bills)  Short-term, non-interest bearing obligations of the US Treasury issued at a discount and redeemed at maturity for full face value. [Chapter 9]

Treasury bonds  Long-term (more than 10 years' original maturity) obligations of the US Treasury. [Chapter 9]

Treasury notes  Medium-term (2–10 years' original maturity) obligations of the US Treasury. [Chapter 9]

*Treasury stock  Common stock that has been repurchased and is held by the issuing company. [Chapters 18 and 20]

Trustee  A person or institution designated by a bond issuer as the official representative of the bondholders. Typically, a bank serves as trustee. [Chapter 20]

Trust receipt  A security device acknowledging that the borrower holds specifically identified inventory and proceeds from its sale in trust for the lender. [Chapter 11]

Two-tier tender offer  Tender offer in which the bidder offers a superior first-tier price (e.g., higher or all cash) for a specified maximum number (or percent) of shares and simultaneously offers to acquire the remaining shares at a second-tier price (e.g., lower and/or securities rather than cash). [Chapter 23]

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U

Underwriting  Bearing the risk of not being able to sell a security at the established price by virtue of purchasing the security for resale to the public; also known as firm commitment underwriting. [Chapter 19]

Underwriting syndicate  A temporary combination of investment banking firms formed to sell a new security issue. [Chapter 19]

Uniform Commercial Code  Model state legislation related to many aspects of commercial transactions that went into effect in Pennsylvania in 1954. It has been adopted with limited changes by most state legislatures. [Chapter 11]

Unit contribution margin  The amount of money available from each unit of sales to cover fixed operating costs and provide operating profits. [Chapter 16]

Unsecured loans  A form of debt for money borrowed that is not backed by the pledge of specific assets. [Chapter 11]

Unsystematic risk  The variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification. [Chapter 5]

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V

Virtual corporation  A business organizational model that involves the large-scale outsourcing of business functions. [Chapter 23]

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W

Warrant  A relatively long-term option to purchase common stock at a specified exercise price over a specified period of time. [Chapter 22]

White knight  A friendly acquirer who, at the invitation of a target company, purchases shares from the hostile bidder(s) or launches a friendly counter bid in order to frustrate the initial, unfriendly bidder(s). [Chapter 23]

Wire transfer  A generic term for electronic funds transfer using a two-way communications system, like Fedwire. [Chapter 9]

Working capital management  The administration of the firm's current assets and the financing needed to support current assets. [Chapter 8]

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Y

Yield curve  A graph of the relationship between yields and term to maturity for particular securities. [Chapter 2]

Yield to maturity (YTM)  The expected rate of return on a bond if bought at its current market price and held to maturity. [Chapter 4]

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Z

Zero balance account (ZBA)  A corporate checking account in which a zero balance is maintained. The account requires a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent. [Chapter 9]

Zero-coupon bond  A bond that pays no interest but sells at a deep discount from its face value; it provides compensation to investors in the form of price appreciation. [Chapter 4]

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