Glossary of Terms

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

ABC Inventory Classification
A method of dividing inventory items into three groups-those with a relatively large dollar value but a small percentage of the total items, those with a small dollar value but a large percentage of the total items, and those items in between.

Absolute Priority
A decision rule sometimes used in bankruptcy proceedings that states that the claims of creditors are satisfied before the claims of shareholders.

Accrued Expenses
Expenses such as accrued wages, taxes, and interest, which represent liabilities for services rendered to the firm that have not yet been paid for by the firm. As such, they constitute an interest-free source of financing.

Acquisition
Any transaction whereby one firm obtains control over another.

Advance Factoring
The case where a firm obtains an advance on factored assets prior to the normal collection or due date of the factored accounts.

Affirmative Loan Covenant
A portion of a loan agreement that outlines actions a firm's management agrees to take as conditions for receiving the loan.

After-Tax Cash Flow (ATCF)
Earnings after tax plus noncash charges, such as depreciation and future tax liabilities.

Agency Costs
Costs incurred by owners of a firm when the firm is managed by others, including monitoring costs, bonding costs, and any losses that cannot be eliminated economically by monitoring and bonding.

Agency Relationships
Occur when one (or more) person (principal) hires another person (agent) to perform a service on the principal's behalf. Agency relationships often lead to agency problems and costs. Two of the most important agency relationships are those between owners (shareholders) and managers and between owners and creditors.

Agent
The person who acts on behalf of the principal and has a legal responsibility to act in the best interests of the principal in an agency relationship.

Amalgamation
The fusion of two or more firms by transfer of their assets and liabilities to a new firm.

Amortization Schedule
A listing of the periodic payments of interest and principal owed on a debt obligation.

Annual Financing Cost (AFC)
See Annual Percentage Rate (APR).

Annual Percentage Rate (APR)
The simple, annual percentage interest rate for a loan.

Annuity
The payment or receipt of a series of equal cash flows per period for a specified amount of time. In an ordinary annuity, payments are made at the end of each period. In an annuity due, payments are made at the beginning of each period.

Arbitrage
The process of simultaneously buying and selling the same or equivalent securities in different markets to take advantage of temporary price differences.

Asset Management Ratios
Financial ratios that indicate how efficiently a firm is using its assets.

Assignment
The process of informally liquidating a business. Assignment occurs outside the jurisdiction of the bankruptcy courts.

Asymmetric Information
The information that managers of a firm, as insiders, have about expected future earnings and cash flows that is not available to outside investors.

Availability (Cheque-Clearing) Float
The delay between the time a cheque is deposited in the payee's account and the time the funds are available to be spent.

Average Collection Period
The average number of days between when a credit sale is made and when the customer's payment is received.

Average Tax Rate
The average tax rate is calculated by dividing the total amount of taxes payable by the taxable income.

B

Bad-Debt Loss Ratio
The proportion of the total receivables volume that is never collected by a business.

Balance Sheet
A financial statement that lists a firm's assets, liabilities, and shareholders' equity at a point in time.

Balloon Loan
A loan that requires a large final payment greater than each of the periodic (principal and interest) payments.

Bank Rate
The rate of interest charged to banks that borrow from the Bank of Canada.

Banker's Acceptance
A short-term debt instrument issued by a firm as part of a commercial transaction. Payment is guaranteed by a bank that accepts it.

Bankruptcy
A situation in which a firm is unable to pay its debts and its assets are turned over to the court for administration.

Bankruptcy and Insolvency Act
The federal law governing bankruptcies.

Best Efforts
A transaction in which the investment dealers agree to do their best to sell the securities being issued. The issuing firm has no guarantee that the desired amount of money will be raised.

Beta
A measure of systematic risk. It indicates the volatility of a security's returns relative to the returns of a broad-based market portfolio of securities.

Bond
A long-term debt security that promises to pay the lender a series of periodic interest payments in addition to returning the principal at maturity. Most corporate bonds are offered in $1,000 principal amounts (par value).

Bond Rating
An evaluation of a bond's probability of default. This is performed by an outside rating agency, such as DBRS or S&P.

Bond Refunding
The redemption of a callable bond issue and replacement with a lower-interest cost issue.

Book Value
The accounting value of an asset or a corporation. The book value per common share is equal to the total book value of the firm, or shareholders' equity, divided by the total number of common shares outstanding.

Bought Deal
A firm commitment underwriting by investment dealers who agree to buy all of the securities issued by a firm. The underwriters then take the risk that they will be able to sell the securities.

Break-Even Analysis
An analysis tool that considers the relationship between sales, fixed costs, variable operating costs, and operating income at various output levels.

Bullet Loan
A loan that requires only the periodic payment of interest during the term of the loan, with a final single repayment of principal at maturity.

Business Risk
The variability in a firm's operating earnings (EBIT).

C

Call Feature
A provision that permits an issuer of bonds (and sometimes preferred shares) to retire the obligation prior to its maturity.

Call Option
A contract that gives the holder the right but not the obligation to buy an asset at a set price. Also referred to as a call.

Call Premium
The difference between a bond's call price and its par value.

Call Price
The price at which a bond may be retired, or called, prior to its maturity.

Capital Asset Pricing Model (CAPM)
A theory that formally describes the nature of the risk-required rate of return relationship on investments in assets.

Capital Budgeting
The process of planning for purchases of assets whose cash flows are expected to continue beyond one year.

Capital Cost Allowance (CCA)
The depreciation system that must be used for Canadian income tax purposes and capital budgeting decisions. Each depreciable asset is placed in an asset class and the appropriate CCA rate is applied each year to the declining balance in the class.

Capital Expenditure
The amount of money spent to purchase a long-term asset, such as a piece of equipment. This cash outlay generally is expected to result in a flow of future cash benefits extending beyond one year in time. (Also called capital investment.)

Capital Gain
Profit on the sale of a capital asset.

Capital Gains Yield
The expected percentage increase in the price of a capital asset.

Capital Loss
Loss on the sale of a capital asset.

Capital Markets
Financial markets in which long-term securities are bought and sold.

Capital Market Line (CML)
The slope of the capital market line measures the equilibrium market price of risk.

Capital Rationing
The limiting of capital expenditure projects that meet the firm's criteria for acceptability. Capital rationing may be self-imposed (soft) because of a lack of sufficient managerial resources or externally imposed (hard) by the capital markets that make borrowing too expensive or impossible.

Capital Recovery
An annuity amount necessary to recover a capital investment.

Capital Structure
The amount of permanent short-term debt, long-term debt, preferred shares, and common equity used to finance a firm.

Capitalization of Cash Flow Valuation Method
A method of determining the present value of an asset that is expected to produce a stream of future cash flows. This involves discounting the stream of expected cash flows at an appropriate rate.

Carrying Costs
All costs associated with holding items in inventory for a given period of time.

Cash Break-Even Point
The level of output (units) required to cover a firm's fixed cash operating outlays.

Cash Budget
A projection of a firm's cash receipts and disbursements over some future time period.

Cash Conversion Cycle
The net time interval between the collection of cash receipts from sales and the cash payments for the firm's various resources. The cash conversion cycle is calculated by subtracting the payables deferral period from the operating cycle.

Cash Discount
A price reduction offered for early payment of an invoice.

Cash Flow
The actual amount of cash collected and paid out by a firm.

Cash Flow
Forecasting The projection and estimation of a firm's future cash flows.

Cash Flow Statement
A financial statement showing the effects of a firm's operating, investing, and financing activities on its cash balance.

Cash Insolvency Analysis
A method of financial forecasting that requires the preparation of a detailed cash budget under assumed recessionary conditions.

Certainty Equivalent
The amount of cash someone would require with certainty in order to make him or her indifferent between that certain amount and an amount expected to be received with risk at the same point in time.

Characteristic Line
A regression line relating the periodic returns for a specific security to the periodic returns on the market portfolio. The slope of this regression line is an estimate of the beta of the security-a measure of its systematic risk.

Chattel Mortgage
A lien on personal property, such as machinery, as security for the repayment of a loan.

Clientele Effect
The concept that investors will tend to be attracted to firms that have dividend policies consistent with the investors' objectives.

Coefficient of Variation
The ratio of the standard deviation to the expected value. It provides a relative measure of risk.

Collection Effort
The methods a business employs in attempting to collect payment on past-due accounts.

Commercial Paper
Short-term unsecured promissory notes issued by major corporations with good credit ratings.

Common-Size Balance Sheet
A balance sheet in which a firm's assets and liabilities are expressed as a percentage of total assets, rather than as dollar amounts.

Common-Size Income Statement
An income statement in which a firm's income and expense items are expressed as a percentage of net sales, rather than as dollar amounts.

Common Shares
A type of equity that represents a residual claim in that dividends are paid out only after more senior financial obligations are fulfilled, such as interest on debt and dividends on preferred shares.

Comparative Analysis
An examination of a firm's performance based on one or more financial ratios, which are compared with the financial ratios of competitive firms or with an industry standard or benchmark.

Compensating Balance
A minimum (absolute or average) balance that a bank customer agrees to keep in its chequing account. This balance, which the bank can invest in interest-earning assets, compensates the bank for the services rendered to the customer.

Competitive Bidding
The process of selling a new security offering to the highest bidding underwriting syndicate of investment dealers.

Composition
A situation in which a failing business is permitted to discharge its debt obligations by paying less than the full amounts owed to creditors.

Compound Interest
Interest that is paid not only on the principal but also on any interest earned but not withdrawn during earlier periods.

Concentrator Accounts
The use of decentralized collection centres to collect customer payments and forward the funds to the concentrator account. This speeds up a firm's collections.

Conditional Sales Contract
A financing agreement in which the seller of a piece of equipment retains title until all payments have been made.

Conglomerate Merger
A combination of two or more firms in which neither competes directly with the other and no buyer-seller relationship exists.

Consolidation
A combination in which all of the combining firms are dissolved and a new firm is formed.

Constant Payout Dividend Policy
A dividend policy that aims to pay out a constant percentage of a firm's earnings to shareholders.

Contingent Claim
A security whose payoffs depend on the value of another security.

Contingent Project
A project whose acceptance depends on the adoption of one or more other projects.

Contribution Margin
In break-even analysis, the difference between the selling price per unit and the variable cost per unit.

Conversion Premium
The amount by which the market value of a convertible security exceeds the higher of its conversion value or straight-bond (preferred) value.

Conversion Price
The effective price an investor pays for common shares obtained by converting a convertible security.

Conversion Ratio
The number of common shares an investor obtains by converting a convertible security.

Conversion Value
The value of a convertible security, based on the value of the underlying common shares.

Convertible Bond
A bond that may be exchanged for common shares at the holder's option.

Convertible Security
A fixed-income security that may be exchanged for a firm's common shares at the holder's option. The two most common types of convertible securities are convertible preferred shares and convertible debentures.

Core Earnings
A less volatile measure of a firm's earnings used by S&P.

Corporation
A business organization that is created as a "legal person" separate and distinct from the individual or individuals who own the firm's shares. The primary characteristics and advantages of incorporating include limited liability for the firm's owners, permanency, and flexibility with respect to making changes in ownership.

Correlation
A relative statistical measure of the degree to which two series of numbers, such as the returns from two assets, tend to move or vary together.

Cost of Capital
The equilibrium rate of return demanded by investors in the securities issued by a firm.

Coupon Rate of Interest
The interest rate stated on a bond. The coupon rate of interest times the par, or principal, value of a bond determines the periodic dollar interest payment received by the bondholder.

Covariance
An absolute statistical measure of how closely two variables (such as securities' returns) move together. It measures the degree to which increases (decreases) in the level of one variable tend to be associated with increases (decreases) in the level of another variable over time.

Covered Interest Arbitrage
A risk-free transaction in which short-term funds are moved between two currencies to take advantage of interest rate differentials. Exchange rate risk is eliminated through the use of forward contracts.

Credit Period
The length of time a credit customer has to pay the account in full.

Credit Standard
The criteria a firm uses to screen credit applicants to determine which of its customers should be offered credit and how much.

Creditor
A lender to a firm.

Cumulative Dividends
A typical feature of preferred shares that requires past-due dividends to be paid before any common share dividends can be paid.

Cumulative Voting
A procedure by which shareholders may cast multiple votes for a single candidate for the board of directors. It makes it easier for shareholders with minority views to elect sympathetic board members.

Current Ratio
A measure of liquidity that is calculated as current assets divided by current liabilities.

Current Yield
The annual periodic payment divided by the current (market) price of a financial asset.

D

Debenture
A bond that is not secured by any specific asset but instead by the general credit and earning power of the issuing firm.

Debt Capacity
The amount of debt contained in a firm's optimal capital structure.

Debt Ratio
A leverage ratio calculated by dividing total debt by total assets that indicates how much of the firm's assets were financed with debt.

Debt Securities
Financial assets that represent debt transactions.

Debt-to-Equity Ratio
A leverage ratio calculated by dividing total debt by total equity that indicates how much of the firm's capital comes from debt financing.

Declaration Date
The day on which the directors of a company declare a dividend.

Default Provisions
Permit the lender to insist that the borrower repay the entire loan immediately under certain conditions.

Default Risk
The risk that a borrower will fail to make interest payments, principal payments, or both, on a loan.

Default Risk Premium
The premium that investors require on securities that have default risk.

Deferred Income
Payments received for goods and services that the firm has agreed to deliver at some future date.

Degree of Combined Leverage (DCL)
The percentage change in a firm's earnings per share (EPS) resulting from a 1 percent change in sales or output. This also is equal to the degree of operating leverage times the degree of financial leverage used by the firm.

Degree of Financial Leverage (DFL)
The percentage change in a firm's EPS resulting from a 1 percent change in EBIT.

Degree of Operating Leverage (DOL)
The percentage change in a firm's EBIT resulting from a 1 percent change in sales or output.

Demand Deposits
Money deposited in a chequing account.

Depreciation
The systematic allocation of the cost of an asset over its expected economic life or some other period of time for financial reporting purposes.

Derivative Securities
Financial assets that derive their value from some other security or asset, such as shares, bonds, currencies, commodities, or interest rates. The two broadest categories of derivative securities are options and forward contracts.

Deterministic Model
A financial planning model that projects single number estimates of a financial variable or variables without specifying their probability of occurrence.

Direct Lease
A lease that is initiated when a firm acquires the use of an asset that it did not previously own.

Direct Placement
The sale of an entire security offering to one or more institutional investors rather than the general public. This also is termed a private placement.

Direct Quote
The home currency price of one unit of a foreign currency.

Direct Transfer
The transfer of funds directly from lenders to borrowers, usually facilitated by investment dealers.

Discount Period
The length of time a credit customer has to pay the account and still be eligible to take any cash discount offered.

Discount Rate
The rate of interest used in the process of finding present values, also called the required rate of return.

Discounted Loan
A loan in which the bank deducts the interest in advance at the time the loan is made.

Discriminant Analysis
A statistical technique designed to classify observations (firms) into two or more predetermined groups based on certain characteristics (such as financial ratios) of the observations.

Diversification
The act of investing in a set of financial (securities) or physical assets having different risk-return characteristics.

Divestiture
A firm may divest, or sell off, a division that no longer fits its strategy.

Dividend Gross-Up and Tax Credit
A method used in Canada to partially compensate investors for the taxes already paid by the corporation. According to the tax rules in effect in 2003, the cash dividend received by the investor is grossed-up by 25% and the investor is allowed a tax credit (reduction) of 13.33% of the grossed-up amount.

Dividend Payout Ratio
A ratio calculated by dividing the dividend per share by the earnings per share.

Dividend Reinvestment Plan (DRP or DRIP)
A plan that allows shareholders to have their cash dividends automatically reinvested in additional shares.

Dividend Yield
The annual dividend payment divided by the market price of the share.

Divisional Cost of Capital
A risk-adjusted discount rate for investments being evaluated by a firm's various divisions. It reflects both the differential required returns of equity investors, estimated from the security market line, and a division's differential debt capacity.

Draft
A financial instrument that is similar to a cheque except it is not payable on demand. Rather a draft must be presented to the issuer for approval before a payment is made.

E

Earnings after Taxes (EAT)
A firm's earnings after taxes is the amount available for dividends to shareholders or for reinvestment in the firm.

Earnings before Interest and Taxes (EBIT)
A firm's earnings before payment of interest and taxes (also called operating earnings).

Earnings per Share (EPS)
A firm's earnings per share is calculated by dividing the earnings after tax by the number of shares outstanding.

EBIT-EPS Indifference Point
That level of EBIT where the earnings per share of a firm are the same, regardless of which of two alternative capital structures is employed.

Economic Exposure
The extent to which changes in real exchange rates lead to a change in the value of a firm's operating cash flows, and hence its value. Also known as operating exposure.

Economic Order Quantity (EOQ)
The quantity of an inventory item that should be ordered to minimize total inventory costs.

Economic Value Added (EVA)
The difference between operating profits after tax and the cost of capital that indicates a firm's success in creating value for shareholders.

Effective Annual Rate (EAR)
The effective annual rate of interest paid by the borrower or earned by the lender.

Efficient Capital Market
A financial market in which new information is quickly reflected in security prices in an unbiased manner.

Efficient Frontier
The set of efficient portfolios.

Efficient Portfolio
A portfolio that, for a given standard deviation, has the highest expected return, or, for a given expected return, has the lowest standard deviation.

Equity Multiplier
A ratio calculated by dividing total assets by total equity.

Equity Securities
Financial assets that represent ownership transactions.

Equivalent Annual Annuity
A method for making capital budgeting decisions involving projects having different useful lives.

Euro
The European single currency that went into circulation in 2002.

Eurobond
An international bond issued outside the country in whose currency the bonds are denominated.

Eurocurrency
A currency that is deposited in a bank outside of the country of origin.

Eurodollars
US dollars deposited in banks outside the United States.

Exchange Rate
The rate at which a currency can be converted into another currency.

Exchange Ratio
The number of shares an acquiring company must give, or exchange, for each share of an acquired company in a merger.

Ex-Dividend Date
The date on which the right to the most recently declared dividend no longer goes along with the sale of the shares.

Exercise Price
The price at which an option holder can purchase or sell the underlying asset, such as common shares. This also is termed the strike price.

Expectations Theory
A theory that posits that long-term interest rates are a function of expected short-term interest rates.

Expected Market Return
The return investors expect to earn on shares with average risk, i.e., a beta of 1.0.

Expected Return
The benefits (price appreciation and distributions) an investor anticipates receiving from an investment.

Expected Value
A statistical measure of the mean or average value of the possible outcomes. Operationally, it is defined as the weighted average of the possible outcomes with the weights being the probability of occurrence.

Ex-Rights
A share sells ex-rights when purchasers no longer receive the rights along with the shares purchased.

Extendible Bonds
Bonds whose maturity may be extended by the investor.

Extension
A situation in which a failing business is permitted to lengthen the amount of time it has to meet its obligations with creditors.

F

Factoring
The sale of a firm's accounts receivable to a financial institution known as a factor.

Field Warehouse
Financing Agreement A loan agreement in which the inventory being pledged as collateral is segregated from the firm's other inventories and stored on its premises under the control of a field warehouse company.

Fair Value
The value of a share determined by the discounted cash flow method.

FIFO
The acronym for the first-in, first-out inventory valuation method. The method assumes that a firm uses the oldest items in the inventory first. Thus, they are priced out of the inventory based on the oldest inventory acquisition costs rather than the most recent.

Financial Analysis
The utilization of a group of analytical techniques, including financial ratio analysis, to determine the strengths, weaknesses, and direction of a firm's performance.

Financial Distress Costs
The costs incurred to avoid bankruptcy plus the direct and indirect costs incurred if a firm files for bankruptcy protection.

Financial Forecasting
The projection and estimation of a firm's future financial statements.

Financial Lease
A noncancellable agreement that obligates the lessee to make payments to the lessor for a predetermined period of time. These payments are usually sufficient to amortize the full cost of the asset plus provide the lessor with a reasonable rate of return on its investment in the asset.

Financial Leverage
The extent to which a firm is financed by securities having fixed costs or charges, such as debt and preferred shares.

Financial Leverage Management Ratios
Financial ratios that measure the degree to which a firm is financing its assets with fixed-charge sources of funds such as debt, preferred shares, or leases.

Financial Planning Model
A computerized representation of some aspect of a firm's financial planning process.

Financial Ratio
A statistical yardstick that relates two numbers generally taken from a firm's income statement, balance sheet, or both at a specific point in time.

Financial Risk
The additional variability of a firm's earnings per share and the increased probability of insolvency that result from the use of fixed-cost sources of funds, such as debt and preferred shares. In general, the more financial leverage a firm uses, the greater is its financial risk.

Financial Slack
Highly liquid assets (i.e., cash and marketable securities) plus unused debt capacity that allow a firm to take advantage of any attractive investment opportunities.

Financial Structure
The amount of current liabilities, long-term debt, preferred shares, and common equity used to finance a firm.

Finder's Fee
A commission paid to an investment dealer who finds a buyer for a direct placement.

Fisher Effect
A relationship indicating that nominal (and risk-free) interest rates are approximately equal to the sum of the real interest rate and the expected inflation rate.

Fixed-Asset Turnover Ratio
An asset management ratio calculated by dividing sales by net fixed assets that shows how well a firm is using its fixed assets to generate sales.

Fixed Costs
Costs that do not vary as the level of a firm's output changes.

Fixed-Income Securities
Financial assets, such as bonds and preferred shares, that pay contractually fixed periodic payments to investors.

Float
The difference between an account balance as shown on the bank's books and as shown on the firm's books. Float represents the net effect of the delays in the payment of cheques the firm writes and the collection of cheques the firm receives.

Floating Lien
An inventory loan in which the lender receives a security interest or general claim on all of a company's inventory.

Flotation Cost
The cost of issuing new securities. This includes both underwriting expenses and other issue expenses, such as printing and legal fees.

Fluctuating Current Assets
Current assets affected by the seasonal or cyclical nature of the firm's sales.

Foreign Bond
An international bond denominated in the currency of the country in which it is issued. The issuer, however, is from another country.

Formal Virtual Markets
Secondary securities markets that have listing requirements but no physical place of business, such as NASDAQ.

Forward Contract
A contract calling for the delivery of a specified amount of some item at a future point in time at a price set at the present time. Compared to futures contracts, forward contracts are not liquid, can be customized with regard to the date or amount, and carry performance risk.

Forward Rate
The rate of exchange between two currencies being bought and sold for delivery at a future date.

Free Cash Flow
That portion of a firm's total cash flow that is available to pay interest, pay dividends, or make capital investments.

Functional Currency
The currency in which the majority of a firm's transactions are denominated. The US dollar is the functional currency for many Canadian firms.

Future Value
The value at some future point in time of a present payment (or a series of payments) evaluated at the appropriate interest (growth) rate.

Futures Contract
A contract calling for the delivery of a standardized quantity and quality of some item, such as a foreign currency, crude oil, or securities, at a future point in time at a price set at the present time.

G

Generally Accepted Accounting Principles (GAAP)
A broad set of accounting rules followed in preparing financial statements.

Going-Concern Value
The value of a firm, assuming that the firm's organization and assets remain intact and are used to generate future income and cash flows.

Golden Parachute
A large top management bonus payable in case of early (involuntary) retirement.

Goodwill An intangible asset equal to the premium over fair market value of the acquired assets that is paid for a target company in a merger.

Greenmail
An operation whereby a firm's management buys back a block of shares at a premium over the market price from another firm to stop it from making a takeover.

Green Shoe Option
An overallotment of shares to the underwriters of new issues that gives them an incentive to work harder.

Gross Profit Margin Ratio
A profitability ratio calculated by dividing sales minus cost of sales that indicates how efficiently the firm is managing the production process.

Growth Annuity
In a growth annuity each succeeding payment grows by a constant percentage of the preceding payment.

Growth Perpetuity
A growth annuity that lasts forever.

H

Half-Year Convention
The income tax law assumes that all assets purchased during any tax year are actually placed into service in the middle of the year, regardless of the actual date.

Hedge
A transaction in which a position is taken in another market, such as the forward or futures market, to offset the risk associated with a position in the current cash (spot) market.

Holding Company
A corporation that controls the voting power of one or more other firms.

Holding Period Return (HPR)
The change in price from holding an asset (security) plus distributions received from the asset divided by the initial price at which the asset was acquired.

Horizontal Merger
A combination of two or more firms that compete directly with each other.

Hurdle Rate
The minimum acceptable rate of return from an investment project. For projects of average risk, it usually is equal to the firm's cost of capital.

Income Bond
A bond that pays interest only if the firm earns sufficient income.

Income Statement
A financial statement that indicates how a firm performed during a period of time.

Indenture
The contract between the issuing firm and the lenders in a debt obligation.

Independent Project
A project whose acceptance or rejection does not result directly in the elimination of other projects from consideration.

Indirect Quote
The foreign currency price of one unit of the home currency.

Indirect Transfers
The transfer of funds from savers to investors through financial intermediaries, such as banks.

Informational Content
The concept that, for a firm following a stable dividend policy, changes in dividend payments convey information (i.e., a signal) to investors concerning management's expectations about the firm's future profitability.

Initial Public Offering (IPO)
The first public sale of a firm's shares to the public.

Insolvency
A situation in which either a firm's liabilities exceed its assets or the firm is unable to pay its creditors as required.

Institutional Brokers Estimate System (IBES)
A service providing summaries of the earnings growth rate forecasts of security analysts.

Interest
The return earned by or the amount paid to an investor who foregoes current consumption or alternative investments and "rents" money to a business, a bank, an individual, the government.

Interest Rate Parity (IRP)
The theory that the percentage differential between the spot and the forward rate for a currency quoted in terms of another currency is equal to the approximate difference in interest rates in the two countries over the same time horizon.

Interest Rate Risk
The variation in the market price (and hence in the realized rate of return or yield) of a security that arises from changes in interest rates.

Interest Rate Swap
The exchange of floating rate interest payments for fixed-rate interest payments, or vice versa.

Internal Rate of Return (IRR)
The discount rate that equates the present value of net cash flows from a project with the present value of the net investment. It is the discount rate that gives the project a net present value equal to zero.

International Bond
A bond issued outside the country of the borrower.

International Fisher Effect (IFE)
The theory that the difference in interest rates between two countries should be offset by equal but opposite changes in the future spot exchange rate.

Intrinsic Value
The value of a share determined by the discounted cash flow method.

Inventory Conversion Period
The length of time required to produce and sell the product.

Inventory Cycle
The time between placement of successive orders of an item.

Inventory Loan
A short-term loan where the firm's inventory is used as collateral.

Inventory Turnover Ratio
An asset management ratio calculated as cost of sales divided by average inventory that indicates how fast a firm is selling its products.

Investment Dealer/Banker
A financial institution that underwrites and sells new securities. Investment dealers help firms to obtain new financing.

Investment Opportunity Curve
A graph or listing showing a firm's investment opportunities (projects) ranked from highest to lowest expected rate of return. J

J

Joint Venture
A business combination in which two unaffiliated firms contribute financial, physical, and/or personnel assets to a new firm formed to engage in a specific economic activity.

Junk Bond
A high-yield debt security issued by a company with a low credit rating.

Just-in-Time (JIT)
Inventory Management System An approach to inventory and production management in which required inventory items are supplied exactly as needed by production.

L

Large Value Transfer System (LVTS)
An electronic transfer method for settling transactions between and among Canadian chartered banks.

Lead Time
The time between when an order is placed for an item and when the item actually is received in inventory.

Lease
A contract that allows an individual or a firm to make economic use of an asset for a stated period of time without obtaining an ownership interest in it.

Legal Insolvency
A situation in which the recorded value of a firm's assets is less than its liabilities.

Lessee
The user and renter of the property in a lease transaction.

Lessor
The property owner who collects rental payments from the lessee in a lease transaction.

Leveraged Buyout (LBO)
A transaction in which the buyer of a firm borrows a large portion of the purchase price, using the purchased assets as partial collateral for the loans.

Leveraged Lease
A type of financial lease in which the lessor borrows up to 80 percent of the cost of the leased asset on a nonrecourse basis. The lessor receives the full tax benefits of ownership. This is also sometimes called a third-party equity lease or a tax lease.

LIFO
The acronym for the last-in, first-out inventory valuation method. The method assumes that a firm uses the most recently acquired items in the inventory first. Thus, they are priced out of the inventory based on the most recent inventory acquisition costs rather than the oldest.

Limited Liability
Liability for the debts of a business venture that is limited to the amount invested.

Line of Credit
An agreement that permits a firm to borrow funds up to a predetermined limit at any time during the life of the agreement.

Liquidation Value
The value of a firm, assuming that it sells all its assets and stops using them to generate future income and cash flows.

Liquidity
The ability of a firm to meet its cash obligations as they come due.

Liquidity Preference Theory
See Maturity Risk Premium Theory.

Liquidity Ratios
Financial ratios that indicate a firm's ability to meet short-term financial obligations.

Listed Security Exchanges
Organized secondary security markets, such as the Toronto Stock Exchange (TSX) that operate at designated places of business.

Lockbox
A post office box maintained by a firm's bank close to customers to speed up the collection of payments from customers.

London Interbank Offer Rate (LIBOR)
The interest rate at which banks in the Eurocurrency market lend to each other.

M

Mail Float
The delay between the time a payment is sent to the payee through the mail and the time that payment arrives at the payee's office.

Marginal Cost of Capital
The weighted after-tax cost of the next dollar of capital the firm expects to raise to finance a new investment project.

Marginal Tax Rate
The tax rate on the next dollar of taxable income earned by a taxpayer.

Market Portfolio
The portfolio of securities consisting of all available securities weighted by their respective market values.

Market Segmentation Theory
A theory that posits that capital markets are segmented by maturity.

Market Value (of a security)
The price at which a security trades in the financial marketplace.

Market Value Added (MVA)
The difference between the market value of a firm's debt and equity securities and the capital that has been invested in the firm.

Market Price-to-Book Value Ratio
A ratio calculated by dividing the market price per share by the book value per share.

Marketability Risk
The ability of an investor to buy and sell an asset (security) quickly and without a significant loss of value.

Marketability Risk Premium
The additional return investors require because a security has marketability risk.

Marketable Securities
Short-term investments in which firms often invest their temporarily idle cash.

Market-Based Ratios
Financial ratios that measure the market's (investors') assessment of the risk and performance of a firm.

Matching Approach
A financing plan in which the maturity structure of a firm's liabilities is made to correspond exactly to the life of its assets.

Maturity Risk Premium Theory
A theory that posits that required returns on long-term securities tend to be higher than returns on short-term securities.

Merger
The fusion of two or more firms into one of the constituent firms that becomes the surviving company.

Misdirected Funds
Funds that cross an international border unintentionally.

Modified Accelerated Cost Recovery System (MACRS)
The depreciation system that must be used in the United States for income tax purposes and capital budgeting decisions.

Modified Internal Rate of Return (MIRR)
The modified IRR assumes reinvestment of the periodic cash flows at the cost of capital rather than the internal rate of return. It is calculated by equating the PV of the costs of a project with the PV of the terminal value of the cash flows at the end of the project's life.

Money Markets
Financial markets in which short-term securities are bought and sold.

Mortgage Bond
A bond secured by a pledge of a specific asset or group of assets.

Multijurisdictional Disclosure System (MJDS)
A joint Canada-US system that allows issuing firms to use the registration statements and prospectuses of their home country for sales of their securities in the other country.

Multilateral Netting
A process of international cash management designed to minimize the cost associated with misdirected funds.

Multinational Corporation
A firm with direct investments in more than one country.

Multiple Internal Rates of Return
Two or more internal rates of return from the same project. This occurs only with nonnormal projects whose cash flow patterns contain more than one sign change.

Mutually Exclusive Project
A project whose acceptance precludes the acceptance of one or more alternative projects.

N

Negative Loan Covenant
A portion of a loan agreement that outlines actions a firm's management agrees not to take during the term of the loan.

Negative Pledge Clause
A clause found in nearly all unsecured loans. It is designed to keep other lenders from interfering with the immediate lender's claims on the assets of the firm.

Negotiated Underwriting
A process whereby a firm wishing to sell new securities to the public negotiates the terms of the underwriting with the investment dealers.

Net Advantage to Leasing (NAL)
The NAL method compares the NPV cost of leasing with the NPV cost of owning the asset to see if it is advantageous (cheaper) for the firm to lease an asset rather than buy it. This is a financing decision that is made after the firm has completed the capital budgeting decision process and decided that the asset should be acquired.

Net (Operating) Cash Flow
Cash inflow minus cash outflow. It is measured as the change in net operating earnings after taxes plus the change in depreciation minus the change in net working capital requirements associated with a particular investment project.

Net Investment (NINV)
The net cash outlay required at the beginning of an investment project.

Net Present Value (NPV)
The present value of the stream of net cash flows resulting from a project, discounted at the appropriate discount rate (usually the firm's cost of capital), minus the project's net investment. It is used to evaluate, rank, and select from among various investment projects according to the contribution of an investment to shareholders' wealth.

Net Profit Margin Ratio
A profitability ratio calculated by dividing earnings after tax by sales.

Net Working Capital
The difference between a firm's current assets and current liabilities. The term net working capital is frequently used interchangeably with working capital.

Nexus of Contracts
A view of the firm as a focal point of contracts among various stakeholders.

Nonnotification Basis
The customer is not notified that the receivable has been pledged by the firm.

Normal Project
A project whose cash flow stream requires an initial outlay of funds followed by a series of positive net cash inflows. This is sometimes called a conventional project.

O

Operating Cycle
Includes the three primary activities of purchasing resources, producing the product, and distributing (selling) the product. The operating cycle is calculated by summing the inventory conversion period and the receivables conversion period.

Operating Lease
A cancellable lease agreement that provides the lessee with the use of an asset on a period-by-period basis. This sometimes is called a service or maintenance lease, especially if the lessor provides maintenance services as part of the lease contract.

Operating Leverage
The extent to which a firm uses assets having fixed costs.

Operational Cash Flow per Share (OPS)
The operational cash flow per share is calculated by dividing cash flow from operations by the number of shares outstanding.

Opportunity Cost
The rate of return that can be earned on funds if they are invested in the next best alternative investment.

Optimal Capital Budget
The level of capital spending at which a firm's investment opportunity curve just intersects its marginal cost of capital curve.

Optimal Capital Structure
The capital structure that minimizes a firm's weighted cost of capital and, therefore, maximizes the value of the firm.

Optimization Model
A financial planning model that determines the values of financial decision variables that maximize (or minimize) some objective function such as profits (or costs).

Option
A contract (often in the form of a security) that gives its holder the right but not the obligation to buy (call) or sell (put) an asset at a set price during a specified time period.

Ordering Costs
All costs associated with placing and receiving an order.

Over-the-Counter (OTC) Securities Markets
A network of security dealers connected by a communications system of telephones and computer terminals that provides price quotations on individual securities.

Overnight Rate
The interest rate charged on loans from one chartered bank to another.

P

Par Value (Bond)
The amount of principal borrowed (usually $1,000) and due at maturity.

Par Value (Preferred or Common Shares)
An arbitrary value assigned by the issuing firm.

Partnership
A business organization in which two or more persons form a business with the intention of making a profit. In a general partnership, each partner has unlimited liability for the debts of the firm. Limited partnerships allow one or more partners to have limited liability.

Passive Residual Dividend Policy
A theory of dividend policy that suggests that a firm should retain its earnings as long as there are investment opportunities available promising a rate of return higher than the required rate of return.

Payables Deferral Period
The length of time a firm is able to deter payment on its resource purchases.

Payback (PB) Period
The period of time required for the cumulative cash inflows from a project to equal the initial cash outlay.

Pecking Order Theory
A capital structure theory indicating that firms prefer internal financing (retained earnings) to external financing (new security issues) and that, if external financing is required, debt is preferred to new common share issues.

Percentage of Sales Forecasting Method
A method of estimating the additional financing that will be needed to support a given future sales level.

Performance Shares
Shares given to executives depending on their performance.

Permanent Current Assets
Current assets held to meet the firm's long-term minimum needs.

Perpetual Bond
A bond that has no maturity date.

Perpetuity
A financial instrument that pays an equal cash flow per period into the indefinite future (that is, infinity).

Pledging of Accounts Receivable
A short-term borrowing arrangement with a financial institution in which a loan is secured by the borrower's accounts receivable.

Poison Pill
An action taken by a firm to make itself unattractive to potential takeovers.

Pooling of Interests Method
A method of accounting for mergers in which the acquired firm's assets are recorded on the acquiring firm's books at their cost when originally acquired. No goodwill account is created under the pooling method.

Portfolio
A collection of two or more financial (securities) or physical assets.

Post-Audit
A capital budgeting procedure that consists of comparing actual cash flows from a project with projected cash flows that were estimated at the time the project was adopted.

Precautionary Motive
The future cash flows and the ability to borrow additional funds on short notice are often uncertain. Hence, a motive to hold liquid asset balances necessary to meet unexpected requirements for cash.

Preemptive Right
A provision contained in some corporate charters that gives common shareholders the right to buy on a pro rata basis any new common shares sold by the firm.

Preferred Shares
A type of equity with a claim on earnings and assets of a firm-in the form of a (normally) fixed periodic dividend payment-that takes precedence over the claims of common shareholders.

Present Value
The value today of a future payment (or a series of future payments) evaluated at the appropriate discount rate.

Price-to-Earnings Ratio
A ratio calculated by dividing the market price per share by the earnings per share that serves as an indicator of the riskiness of the firm.

Primary Markets
Financial markets in which new securities from an issuing firm are bought and sold for the first time. Investment dealers are active in the primary markets.

Prime Rate
The lowest rate normally charged by banks on loans made to their most creditworthy business customers.

Principal (1)
An amount of money that has been borrowed or invested.

Principal (2)
In an agency relationship, the party who employs someone else, the agent, to perform service on behalf of the principal.

Pro Forma Financial Statements
Financial statements that project the results of some assumed event, rather than an actual event.

Probabilistic Model
A financial planning model that uses probability distributions as inputs and generates a probability distribution for financial variables as output.

Processing Float
The delay between receipt of payment from a payer and the deposit of that receipt in the payee's account.

Profitability Index (PI)
The ratio of the present value of net cash flows over the life of a project to the net investment. It is used to evaluate, rank, and select from among various investment projects. It is used frequently in capital rationing situations.

Profitability Ratios
Financial ratios that measure the total effectiveness of a company's management in generating profits.

Promissory Note
A formal short-term credit obligation that states the amount to be paid and the due date.

Prompt Offering Prospectus (POP) System
A method whereby large firms can issue securities over a period of time with the same registration statement and prospectus.

Prospectus
A document that contains information about a company's legal, operational, and financial position. It is prepared for the benefit of prospective investors in a new security issued by the firm.

Purchase Method
A method of accounting for mergers in which the total value paid or exchanged for the acquired firm's assets is recorded on the acquiring firm's books. Any difference between the acquired assets' fair market value and their purchase price is recorded as goodwill.

Purchasing Power Parity (PPP)
A theory that posits that the law of one price for the same product in different countries will be the same in each country after making the appropriate conversion from one currency into the other.

Purchasing Syndicate
A group of investment dealers who agree to underwrite a new security issue in order to spread the risk of underwriting.

Put-Call Parity
The price of a share equals the price of the same share synthetically created. (See Equation 17A.2.) The synthetic share consists of buying one European call, selling one European put with the same strike price and time to maturity, and buying a risk-free asset whose maturity value is the strike price.

Put Option
A contract that gives the holder the right but not the obligation to sell an asset at a set price during a specified period of time. Also referred to as a put.

Q

Quick Ratio
A liquidity ratio calculated as current assets minus inventories divided by current liabilities.

R

Rate of Interest
The percentage on the principal that the borrower pays the lender per time period as compensation for foregoing other investment or consumption opportunities.

Real Interest Rate
An interest rate adjusted for the effects of inflation.

Real Option
Managerial opportunities to make decisions that will impact the expected cash flows of a project, their timing, or the future acceptability of the project. Real options include abandonment options, investment timing (delay) options, shutdown options, growth options, and flexibility (designed-in) options.

Receivables Conversion Period
The length of time required to collect sales receipts. Receivables conversion period is another name for the average collection period.

Receivables Turnover Ratio
An asset management ratio calculated by dividing 365 by the average collection period that indicates how fast a firm is collecting its accounts receivable.

Record Date
The date on which a firm makes a list from its stock transfer books of those shareholders who are eligible to receive the declared dividend.

Reinvestment Rate
The rate of return at which cash flows from an investment project are assumed to be reinvested from year to year. The reinvestment rate may vary, depending on the investment opportunities available to the firm.

Reinvestment Rate Risk
Risk that occurs when a bond issue matures (or is called) and because of a decline in interest rates, the owner has to reinvest the principal at a lower coupon rate.

Registration Statement
An information disclosure document required of firms that issue securities.

Relative Purchasing Power Parity
The theory that the spot exchange rate between two currencies should change by an amount approximately equal to the difference in expected inflation rates in the two countries.

Reorder Point
The inventory level at which an order should be placed for replenishment of an item.

Replacement Chains
A method for making capital budgeting decisions involving projects that have different useful lives. It assumes that the original investment can be replicated indefinitely so as to match the useful life of an alternative project.

Repurchase Agreement
An arrangement with a bank or securities dealer in which an investor acquires certain short-term securities subject to a commitment that the securities will be repurchased by the bank or securities dealer on a specified date.

Required Rate of Return
The rate used to value a stream of expected cash flows from an asset (also called the discount rate). The riskier the expected cash flows from the asset, the higher the required rate of return.

Restrictive Loan Covenant
A portion of a loan agreement that limits the scope of certain actions a firm may take during the term of the loan.

Retractable Bond
A bond that allows the investor to reduce or shorten the maturity.

Return on Investment Ratio
A profitability ratio calculated by dividing earnings after tax by total assets that indicates how profitably the firm uses its assets.

Return on Total Equity
A profitability ratio calculated by dividing earnings after tax by total equity that indicates how profitably the firm uses its assets that were financed by equity.

Reverse Stock Split
A stock split in which the number of outstanding shares is reduced.

Revolving Credit Agreement
A binding agreement that commits a bank to make loans to a firm up to a predetermined credit limit. To obtain this type of commitment from a bank, a firm usually pays a commitment fee based on the unused portion of the pledged funds.

Right
A short-term option issued by a firm that permits an existing shareholder to buy a specified number of shares at a specified price (the subscription price), which is below the current market price.

Rights Offering
The sale of new common shares by distributing stock purchase rights to a firm's existing shareholders. This also is termed a privileged subscription.

Rights-On
A share sells rights-on when purchasers receive the rights along with the shares purchased.

Risk
The possibility that actual future returns will deviate from expected returns; the variability of returns.

Risk-Adjusted Discount Rate (RADR)
A discount rate that reflects the risk associated with a particular project. In capital budgeting, a higher risk-adjusted rate is used to discount cash flows for riskier projects, whereas a lower risk-adjusted rate is used to discount cash flows for less risky projects.

Risk-Free Rate
The rate of return on securities that are free of default risk, such as T-bills.

Risk Premium
The difference between the required rate of return on a risky investment and the rate of return on a risk-free asset, such as T-bills. Components include maturity risk, default risk, seniority risk, and marketability risk.

S

Sale and Leaseback
A lease that is initiated when a firm sells an asset it owns to another firm and simultaneously leases the asset back for its own use.

Scenario Analysis
A procedure used to evaluate the change in some objective, such as net present value, to simultaneous changes in several variables influencing that objective, such as price, unit sales volume, and operating costs.

Seasonal Datings
Credit terms under which the buyer of seasonal merchandise is encouraged to take delivery well before the peak sales period. Payment on the purchase is deferred until after the peak sales period.

Secondary Markets
Financial markets in which existing securities are offered for resale. The Toronto Stock Exchange (TSX) is a secondary market.

Secured Short-Term Debt
Short-term debt whereby a borrower pledges certain specified assets-such as accounts receivable, inventory, or fixed assets-as collateral.

Security Agreement
A contract between the lender and the firm specifying the collateral held against the loan.

Security Market Line (SML)
The relationship between systematic risk and required rates of return for individual securities.

Semistrong-Form Market Efficiency
A situation in which no investor can expect to earn excess returns based on an investment strategy using any public information.

Senior Debt
Debt that has a higher claim on a firm's earnings and/or assets than junior debt.

Seniority Risk Premium
The additional return that investors require on junior securities.

Sensitivity Analysis
A method of analysis in which a financial planning model is rerun to determine the effect on the output variable(s) (for example, profit) of given changes in the input variable(s) (for example, sales). Sensitivity analysis is sometimes called what if analysis.

Shareholder Wealth
Present value of the expected future returns to the owners (that is, shareholders) of the firm. It is equal to the market value (price) per common share times the number of shares outstanding.

Shareholders' Equity
The total of a firm's common shares, contributed capital (if any), and retained earnings (if any) accounts from the balance sheet. It sometimes is called the book value of the firm, owners' equity, stockholders' equity, or net worth.

Shark Repellents
Anti-takeover measures to deter hostile takeovers.

Shelf Registration
A method whereby large firms can issue securities over a period of time with the same registration statement and prospectus. (See also Prompt Offering Prospectus.)

Signal
Changes in investment, financing or dividend policies that convey information to outside investors concerning management's assessment of the expected future returns of the company.

Simple Interest
Interest paid or earned on the principal only.

Simulation
A financial planning tool that models some event, such as the cash flows from an investment project. A computerized simulation is one technique used to assess the risk associated with a particular project.

Sinking Fund
An annuity amount that must be invested each period (year) to produce a future value.

Sole Proprietorship
A business owned by one person. The owner of a sole proprietorship has unlimited liability for debts incurred by the business.

Spinoff
A spinoff is effected by distributing shares in a subsidiary to shareholders of the parent firm.

Spot Rate
The rate of exchange between two currencies being bought and sold for immediate delivery.

Stable Dollar Dividend Policy
A dividend policy that aims to pay out a constant dollar dividend to shareholders.

Stakeholders
The constituent groups in a firm, including shareholders, bondholders, suppliers, customers, employees, community neighbours, and creditors, as well as governments.

Standard Deviation
A statistical measure of the dispersion, or variability, of possible outcomes around the expected value, or mean. Operationally, it is defined as the square root of the weighted average squared deviations of possible outcomes from the expected value. The standard deviation provides an absolute measure of risk.

Standby Underwriting
An agreement by an investment dealer to purchase all the shares that are not sold to rights holders. The investment dealer then resells the shares to the public and the firm receives the total amount of funds needed, even if the existing shareholders do not all exercise their rights.

Stock Dividend
A payment of additional shares of common stock to shareholders.

Stock Split
The issuance of a number of new shares in exchange for each old share held by a shareholder.

Stockout Cost
The costs that occur when a business is unable to fill orders because the demand for an item is greater than the amount currently available in inventory.

Straight-Bond Value
The value a convertible debt security would have if it did not possess the conversion feature, also referred to as the investment value.

Strong-Form Market Efficiency
A situation in which no investor can expect to consistently earn excess returns because security prices reflect all information, both public and private.

Subordinated Debenture
A bond with a claim on the issuing firm's assets that is junior to other forms of debt in the event of a liquidation. The claims of subordinated debenture holders can be met only after all the claims of senior creditors have been met.

Swap
A contractual agreement between two parties to make periodic payments to each other. They can be interest rate or currency swaps. Fixed-rate interest can be swapped for floating-rate interest. Payments in one currency can be swapped for another currency.

Systematic Risk
That portion of the variability of an individual security's returns that is caused by the factors affecting the market as a whole. This also is called nondiversifiable risk.

Systematic Risk of a Project
The risk contribution of a project to the systematic risk of the firm.

T

Takeover
The purchase by one firm of the majority of another firm's shares.

Target Capital Structure
The proportions of permanent short-term debt, long-term debt, preferred shares, and common equity that a firm desires to have in its capital structure.

Tax Deduction
An amount subtracted from taxable income. For a corporation with a 40 percent marginal tax rate, a $100 tax deduction reduces taxable income by $100 and reduces taxes owed by $40.

Tax Shield
The amount of tax savings from the deductibility of interest payments on debt or CCA in computing corporate income taxes.

Technical Insolvency
A situation in which a firm is unable to meet its current obligations as they come due, even though the value of its assets may exceed its liabilities.

Tender Offer
A public announcement by a firm or individual indicating that it will pay a price above the current market price for the shares "tendered" of a firm it wishes to acquire.

Term Loan
A debt obligation having an initial maturity (i.e., maturity at the time of issue) between 1 and 10 years. Term loans are usually repaid in instalments over the life of the loan. This often is referred to as intermediate-term credit.

Term Structure of Interest Rates
The pattern of interest rate yields for debt securities that are similar in all respects except for their length of time to maturity. The term structure of interest rates usually is represented by a graphic plot called a yield curve.

Terminal Value
The future value of an uneven cash flow stream is found by compounding each payment to the end of the stream and then summing the future values. (See also MIRR.)

Terminal Value
The free cash flow of a firm that grows at a constant rate beyond the end date of a forecast period. Also called the horizon value or continuing value.

Terminal Warehouse Financing Agreement
A loan agreement in which the inventory being pledged as collateral is stored in a bonded warehouse operated by a public warehousing firm.

Times Interest Earned Ratio
A leverage ratio calculated by dividing EBIT by interest charges that indicates the likelihood that a borrower can make required interest payments on time.

Total Asset Turnover Ratio
An asset management ratio calculated by dividing sales by total assets that indicates how well a firm is using its assets to generate sales.

Trade Credit
The short-term credit sources available to a firm can be either spontaneous or negotiated. The major spontaneous source of funds is trade credit.

Transaction Exposure
The potential for a change in the value of a foreign currency-denominated transaction due to a change in the exchange rate after the transaction is entered into but before it is settled.

Translation Exposure
The change in owners' (accounting) equity because of a change in exchange rates that affects the "converted" value of foreign assets and liabilities.

Treasury Shares
Common shares that have been reacquired by the issuing company.

Trend Analysis
An examination of a firm's performance over time. It is frequently based on one or more financial ratios.

Trust Receipt
A security agreement under which the borrower holds the inventory and proceeds from the sale of the inventory in trust for the lender. This is also known as floor planning.

Trustee
The bondholder's representative in a public debt offering. The trustee is responsible for monitoring the borrower's compliance with the terms of the indenture.

U

Undepreciated Capital Cost (UCC)
The cost of a fixed asset that still remains on the books to be written off in the future. The CCA rate is applied each year to this declining balance.

Underwriting
A process whereby a group of investment dealers agrees to purchase a new security issue at a set price and then offers it for sale to investors.

Underwriting Spread
The difference between the selling price to the public of a new security offering and the proceeds received by the offering firm. This also is termed an underwriting discount.

Unsystematic Risk
Risk that is unique to a firm. This is also called diversifiable risk.

V

Variable Cost Ratio
Variable production, administrative, and marketing costs per dollar of sales.

Variable Costs
Costs that vary in close relationship with changes in a firm's output level.

Variable-Income Securities
Financial assets, such as common shares, that do not pay contractually fixed periodic payments to investors.

Vertical Merger
A combination of two or more firms that have a buyer-seller relationship with one another.

W

Warrant
A company-issued long-term option to purchase a specified number of common shares at a particular price during a specified time period.

Weak-Form Market Efficiency
A situation in which no investor can expect to earn excess returns based on historical information.

Weighted Cost of Capital
The weighted average of the marginal costs of debt, equity, and preferred shares, if any, in proportion to their inclusion in the firm's target capital structure.

Working Capital
The difference between a firm's current assets and current liabilities. The term working capital is used interchangeably with net working capital.

Y

Yield Curve
A chart showing interest rate yields in percent on the vertical axis and term to maturity on the horizontal axis.

Yield to Call (YTC)
The discount rate that equates the present value of all expected interest payments and the repayment of principal at the call date from a bond with the present bond price.

Yield to Maturity (YTM)
The discount rate that equates the present bond price with the present value of all expected interest payments and the repayment of principal at the maturity date from a bond.

Z

Zero-Balance System
A payment system that uses a master disbursing account that services all other disbursing accounts. A zero balance is maintained in all but the master account until payments must be made.