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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 Acceptance Credit: a facility to issue bank-guaranteed bills (bank bills) by a firm wanting to raise short-term finance. They can be sold on the money market, but are unrelated to specific trading transactions. The bank accepts the liability to exchange cash for bills when presented at the due date. Acquirees: taken-over firms. Also, ‘targets’ or ‘victims’. Acquirors: firms that make takeovers. Also, ‘predators’. Adjusted NAV: the NAV as per the accounts, adjusted for any known or suspected deviations between book values and market, or realisable values. Adjusted Present Value (APV): the basic NPV of an activity adjusted for ‘bolt-on extras’ like financing costs and benefits, e.g. the tax shield, costs of issuing new finance. Agency Costs: costs that owners (principals) have to incur in order to ensure that their agents (managers) make financial decisions consistent with their best interests. Aggressive Stocks generate returns that vary by a larger proportion than overall market returns. Their betas exceed 1.0. Alternative Investment Market (AIM): where smaller, younger companies can acquire a stock market listing. American Options can be exercised at any time up to the maturity date. Amortisation: repayment of debt by a series of instalments. Also used as a term for depreciation of intangible assets. Annual Percentage Rate (APR): the true annualised cost of finance. Annuity: a finite series of cash flows. Arbitrage: the profitable exploitation of divergences between the prices of goods (or between interest rates), that violate the Law of One Price. Also applied in MM’s capital structure analysis to refer to the process of equalising the values of geared and ungeared firms. Hence, arbitageur. The Arbitrage Pricing Model (APT): an extension of the CAPM to include more than one factor (hence, an example of a multi-factor model) used to explain the returns on securities. Each factor has its own Beta coefficient. Articles of Association: a document drawn up at the formation of an enterprise, detailing the rights and obligations of shareholders and directors. Asset or Activity Beta: the inherent systematic riskiness of a firm’s operations, before allowing for gearing. Also known as Firm Beta, Company Beta, or Ungeared Beta. Asset-Backed Securities are bonds issued on the security of a stream of highly certain income flows, e.g. mortgage payments to a bank, out of which interest payments are made. Asset-Stripping: selling off the assets of a taken-over firm, often in order to recoup the initial outlay. Asymmetric Information: one party to a contract is in possession of more information than the other. Balloon Repayment: most of the loan repayment is made on maturity. Bancassurance: a term coined to denote the combination of banking and insurance business within the same organisation. A Bank Loan is usually extended for a fixed term with a pre-agreed schedule of interest and capital repayments. Interest is usually payable on the initial amount borrowed, regardless of the falling balance as repayments are made. Barter: the simplest form of counter-trade, involving direct exchange of goods with no money being exchanged. Betas (or Beta Coefficients) relate the responsiveness of the returns on individual securities to variations in the return on the overall market portfolio. Beta Geared: the Beta attaching to the ordinary shares of a geared firm. These bear a risk higher than the firm’s basic activity. Beta Ungeared: the geared Beta stripped of the effect of gearing. Corresponds to the activity Beta in an equivalent ungeared firm. Bilateral Netting is operated by pairs of firms in the same group netting off their respective positions regarding payables and receivables. Bill of Exchange: a promise to pay at a specific time issued to suppliers by purchasers in exchange for goods. Bills may be held to maturity or sold at a discount on the money market if cash is required sooner. Bill of Lading: a document that transfers title to exported goods to the bank that finances the deal when the goods are shipped. Bird-in-the-Hand Fallacy: the mistaken belief that dividends paid early in the future are worth more than dividends expected in later time periods, simply because they are nearer in time. Bonds: any form of borrowing firms can undertake in the form of a medium- or long-term security, that commits them to specific repayment dates, at fixed or variable interest. Bonus or Scrip Issues: issues of free shares to existing shareholders in lieu of, or in addition to, cash dividends. Reflected in lower reserves, hence the alternative label, Capitalisation Issue. Book-to-Market Ratio: ratio of the book value of equity to the market value of the shares. Break-Up Value (BUV): the value that can be obtained by selling off the firm’s assets piecemeal to the highest bidders. Bullet Repayment: where a loan is repaid wholly at the maturity date. Business Angels: wealthy private investors who take equity stakes in small, high-risk firms. The Business Expansion Scheme was established to enable investors to obtain tax relief when purchasing ordinary shares in unquoted firms seeking ‘seed-corn’ funds for development. Buy-back: a method of obtaining payment for building a manufacturing unit overseas by taking the future physical product of the plant in return.
Capital: strictly, the funds invested in a firm by shareholders when they purchase ordinary shares, but often used to indicate all forms of equity, and often to refer to any form of finance, whether equity or debt. Capital Allowances: tax allowances for capital expenditure. Capital Asset: any investment that offers a prospective return, with or without risk. However, in finance, the term is usually applied to securities and ordinary shares in particular. Capital Asset Pricing Model (CAPM): a theory used to explain how efficient capital markets value securities, i.e. capital assets, by discounting future expected returns at risk-adjusted discount rates. Capital Gains Tax is paid on realising an increase in share value. Capital gains are currently treated as income in the UK. Capital Gearing: the mixture of debt and equity in a firm’s capital structure, which influences variations in shareholders’ profits in response to sales and EBIT variations. Capitalisation: the procedure of converting (by discounting) a series of future cash flows into a single capital sum. Capitalisation Rate: a discount rate used to convert a series of future cash flows into a single capital sum. The Capital Market Line (CML) traces out the efficient combinations of risk and return available to investors when combining a risk-free asset with the market portfolio. Capital Structure: the mixture of debt and equity resulting from decisions on financing operations. Cash Operating Cycle: length of time between cash payment to suppliers and cash received from customers. The Characteristics Line (CL) relates the periodic returns on a security to the returns on the market portfolio. Its slope is the Beta of the security. The regression model used to estimate Betas is called the market model. Chartist: analyst who relies on charts of past share movements to predict future movements. A Classical Tax System initially taxes company profits, and then also taxes any dividend income. This double taxation of dividends thus provides an incentive to retain profits. Clientèle Effect: the notion that a firm attracts investors by establishing a set dividend policy that suits a particular group of investors. Commercial Paper: a short-term promissory note or IOU, issued by a highly credit-worthy corporate borrower to financial institutions and other cash-rich corporates. Co-movement or
Co-Variability: the tendency for two variables, e.g. the returns
from two investments, to move in parallel. It can be measured using either: A Concentric Acquisition is undertaken to exploit synergies in marketing of two firms’ products, without production economies. Conglomerate Takeover: the acquisition of a target firm in a field apparently unrelated to the acquiror’s existing activities. Contra-Cyclical: a term applied to an investment whose returns fluctuate in opposite ways to general trends in business activity, i.e. contrary to the cycle. Convertible Loan Stock: a debenture that can be converted into ordinary shares, often on attractive terms, usually at the option of the holder. Some preference shares are convertible. Cost of Debt: the yield a firm would have to offer if undertaking further borrowing at current market rates. Cost of Equity: the minimum rate of return a firm must offer owners to compensate for waiting for their returns, and for bearing risk. Counter-Party Risk: the risk that the opposite party to a contract defaults on its obligations. Counter-Trade: a form of trade involving reciprocal obligations with a trading partner, or counter-party, e.g. a commitment to buy from a firm or country that the firm sells to. Country Risk: the risk of adverse effects on the net cash flows of a MNC due to political and economic factors peculiar to the country of location of FDI. Coupon Rate of Interest: the fixed rate of interest, as printed on the debt security, that a firm must pay to lenders. Crest: an electronic mechanism for settling and registering shares sold on the London Stock Exchange. Critical Mass: the minimum size of firm thought necessary to compete effectively, e.g. to finance R & D. Currency Futures Contract: a commitment to deliver a specific amount of foreign exchange at a specified future date at an agreed price incorporated in the contract. Contracts can be traded on an exchange in standard sizes. Currency Option: the right, but not the obligation, to buy or sell a fixed amount of currency at a pre-determined rate at a specified future date. Currency Swap: a transfer of cash payment obligations denominated in foreign currencies. The two parties initially exchange the principal of their respective borrowings, plus the interest commitments in the currencies over an agreed period, and re-exchange the principal at the end of this period. Currency Switching: where a firm uses foreign exchange received in the course of operations to settle obligations to a third party, often located in a third country. Current Cost Accounting (CCA) attempts to capture the effect of inflation on asset values (and liabilities) by recording them at their current replacement cost, i.e. the cost of obtaining an identical replacement. Current Ratio: ratio of current assets to current liabilities.
Debentures: in law, any form of borrowing that commits a firm to pay interest and repay capital. In practice, usually applied to long-term loans that are secured on a firm’s assets. The Debt Capacity of an investment or a whole firm is the maximum amount of debt finance, and hence interest payments that it can support without incurring financial distress. Default: the failure by a borrower to adhere to a pre-agreed schedule of interest and/or capital payments on a loan. A Defensive Stock generates returns that vary by a smaller proportion than overall market returns. Its Beta is less than one. Derivative: financial instrument whose value derives from an underlying asset. Discount Rate: any percentage required return used to convert future expected cash flows into their equivalent present values. Discounted Cash Flow: future cash flows adjusted for the time-value of money. Disintermediation: the process whereby firms borrow and lend funds directly without going through a bank or other intermediary. Diversifiable Risk can be removed by efficient portfolio diversification. Diversification: extension of a firm’s activities into new and unrelated fields. Although this may generate cost savings, e.g. via shared distribution systems, as a by-product, the fundamental motive for diversification is to reduce exposure to fluctuations in economic activity. Dividend Irrelevance: the theory that, when firms have access to external finance, it is irrelevant to firm value whether they pay a dividend or not. Dividend Valuation Model: a way of assessing the value of shares by capitalising the future dividends. With growing dividend payments, it becomes the Dividend Growth Model. Dividend Yield: gross dividend per ordinary share (including both interim and final payments) divided by current share price. Double Tax Agreements (DTAs): reciprocal arrangements between countries whereby tax paid in one location is credited in the second, thus avoiding doubling up the firm’s tax bill. Hence, Double Tax Relief (DTR). Earnings Before Interest, Tax, Depreciation & Amortisation (EBITDA): a rough measure of operating cash flow, effectively, operating profit with depreciation added back. It differs from the ‘Net Cash Inflow from Operating Activities’ shown in cash flow statements due to working capital movements. Earnings Dilution: the dampening effect on EPS of issuing further shares at a discount as in a rights issue. Earnings Yield: EPS divided by current share price. Sometimes, it refers to expected or ‘prospective’ EPS, becoming the ‘Prospective Earnings Yield’. It is a simple way of expressing the investor’s Return on Investment on the share. EBIT: Earnings (i.e. profits) before Interest and Taxation. Economic Order Quantity (EOQ): the most economic quantity to be ordered that minimises holding and ordering costs. Economic Value Added (EVA): post-tax accounting profit generated by a firm reduced by a charge for using the equity (usually, cost of equity times book value of equity). The Efficiency Frontier traces out all the available portfolio combinations that either minimise risk for a stated expected return or maximise expected return for a specified measure of risk. Efficient Markets: where current share prices fully reflect the information available. Enhanced Scrip Dividends: scrip alternatives offered to investors that are worth more than the alternative cash payment. The Enterprise Investment Scheme replaced the BES in 1994, incorporating less generous tax breaks. Enterprise Value: the value of the whole firm. Entrepreneurial Companies are driven by the growth ambitions and desire of the owners to create significant wealth. Equity, or Equity Value: the value of the owners’ stake in a firm, however calculated. The Equity Beta indicates the systematic riskiness attaching to the returns on ordinary shares. It equates to the asset Beta for an ungeared firm, or is adjusted upwards to reflect the extra riskiness of shares in a geared firm, i.e. the ‘Geared Beta’. Equivalent Loan: the loan that would involve the same schedule of interest and loan repayments as the profile of rentals required by an equipment lessor. Equivalent Risk Class: a concept used by MM to include all firms subject to the same business risks (i.e. all having the same Activity Betas). Eurobonds (or International Bonds): securities issued by borrowers in a market outside that of their domestic currency. European Options can only be exercised at the specified maturity date. Exchange Agio: the percentage difference between the spot and forward rates of exchange between two currencies. A share is quoted Ex-Dividend (Ex-Div., or xd) when subsequent purchasers no longer qualify for the forthcoming dividend payment. Until this point, the shares are quoted Cum-Dividend. Exercise (Strike) Price: the price at which the option to buy or sell can be transacted. Expectations (or Unbiased Forward Predictor) Theory: the postulate that the expected change in the spot rate of exchange is equal to the difference between the current spot rate and the current forward rate for the relevant period. Externalisation: the transfer of key functions and expertise to an overseas strategic partner. Factoring: a means of obtaining faster cash inflow, and thus increased funds. A firm appoints the factor to collect outstanding accounts payable and to administer debtors’ accounts. It also lends money to the client based on the value of the firm’s sales. Finance Lease: a method of acquiring an asset that involves a series of rental payments extending over the whole expected life-time of the asset. Financial Distress: in narrow terms, the difficulty that a firm encounters in meeting obligations to creditors. More broadly, it refers to the adverse consequences, e.g. restrictions on behaviour that result, usually from excessive borrowing by a firm. Financial Gearing includes both capital gearing and income gearing. Financial Intermediaries: specialist financial institutions which collect funds from savers and lend to corporate and other borrowers. Financial Services Authority (FSA): a regulatory body for maintaining confidence in the finance markets. A Fixed Charge applies when a lender can force the sale of pre-specified company’s assets in order to recover debts in the event of default on interest and/or capital payments. The Flat Yield (or Running Yield) on a bond is the ratio of the fixed interest payment to the current market price of the bond. A Floating Charge applies when a lender can force the sale of any (i.e.unspecified) of a company’s assets in order to recover debts in the event of default on interest and/or capital payments. Floating Rate Note (FRN): a bond issue where interest is paid at a variable rate. Foreign Bonds: issues of loan stock on the domestic market by non-resident firms or organisations. In London, called ‘bulldogs’, in New York ‘Yankees’. Foreign Currency Swap: a way of extending the delivery date incorporated in a forward contract. A spot/forward swap involves completing the original contract by a spot transaction and entering a new forward contract for the additional of time. Foreign Direct Investment (FDI): investment in fixed assets located abroad for operating distribution and/or production facilities. Foreign Exchange Exposure: the risk of loss stemming from exposure to adverse foreign exchange rate movements. Forfaiting: the practice whereby a bank purchases an exporter’s sales invoices or promissory notes, that usually carry the guarantee of the importer’s bank. Forward Contract: a legal obligation to deliver a specified amount of currency at some specified future date. The rate of exchange is fixed at the date of the contract. Forward Option: a forward currency contract that incorporates an open settlement date between two fixed dates. Forward Rate of Exchange: the rate is the rate fixed for transactions that involve delivery and settlement at some specified future date. Free Cash Flow (FCF): a firm’s cash flow free of obligatory payments. Strictly, it is cash flow after interest, tax and replacement investment, although it is measured in many other ways in practice, e.g. after all investment. Fundamental Analysis: estimation of the true value of a share based on expected future returns. FX: abbreviation for foreign exchange.
Generally Accepted Accounting Principles (GAAP): the set of legal regulations and accounting standards that dictate ‘best practice’ in constructing company accounts. Global Companies serve a range of overseas markets both by exporting and direct investment. Going Concern Value (GCV): the value of the assets as stated in the accounts that assume that the firm will continue as a viable entity as it stands, i.e. as an ongoing activity.
Hedging: attempting to minimise the risk of loss stemming from exposure to adverse foreign exchange rate movements. Hire Purchase: a means of obtaining the use of an asset before payment is completed. An HP contract involves an initial, or ‘down payment’, followed by a series of hire charges at the end of which ownership passes to the user. Home-Made Dividends: cash released when an investor realises part of his/her investment in a firm in order to supplement his/her income. Home-Made Gearing: personal borrowing undertaken in the process of arbitraging between the ordinary shares of geared and ungeared firms. Horizontal Integration: the acquisition of a competitor in pursuit of market power and/or scale economies. Hybrid: a security that embodies features of both equity and debt, and is thus difficult to classify under either category. Imputation Systems of taxation offer shareholders tax credits (fully or partially) in respect of company tax already paid when assessing their income tax liability on dividends paid out. Income Gearing: the proportion of EBIT pre-empted by prior interest commitments, i.e. the inverse of interest cover. The Incremental Hypothesis suggests that firms tend to gradually build their degree of involvement in foreign markets, beginning with exporting and culminating in FDI. Information Asymmetry: the imbalance in access to information about a firm’s affairs as between directors and owners. Information Content: the extra, unstated intelligence that investors deduce from the formal announcement by a firm of any financial news, i.e. what people read ‘between the lines’, or ‘financial body language’. Initial Public Offering (IPO): the first issue of shares by an existing or a newly-formed firm to the general public. Insider trading: dealing in shares using information not publicly available. Interest Agio: the percentage difference between interest rates prevailing in the money markets for lending/borrowing in two currencies. Interest Cover: the number of times the profit before interest exceeds loan interest. Interest Rate Parity (IRP) asserts that the difference between the spot and forward exchanges is equal to the differential between interest rates prevailing in the money markets for lending/borrowing in the respective currencies. Internal rate of return the rates that equate the present value of future cash flows with initial investment cost. Internalisation: the retention by the MNC of key management functions and technology. The International (or Open) Fisher Theory: the notion that, because real rates of interest are equalised throughout the world, given freedom of capital mobility, any observed differences in nominal rates between different locations must be due to different expectations of inflation between those locations. Invoice Discounting: a service less comprehensive than factoring, involving the sale for cash of approved invoices to a financial institution. Joint Venture: a strategic alliance involving the formal establishment of a new marketing and/or production operation involving two or more partners. Junk Bonds: low-quality, risky bonds with no credit rating.
Lagging: settling as late as possible a payable (receivable) denominated in a currency expected to weaken (strengthen). Law of One Price: the proposition that any good or service will sell for the same price, adjusting for the relevant exchange rate, throughout the world. Leading: advancing before the due date a payable denominated in a foreign currency that is expected to strengthen, or advancing a receivable in a currency expected to weaken. Letter of Credit: a credit drawn up by an importer in favour of an exporter. It is endorsed by a bank that guarantees payment provided the beneficiary delivers the Bill of Lading proving that goods have been shipped. Licensing involves the assignment of production and selling rights to producers located in foreign locations in return for royalty payments. Listed Companies: firms whose shares are quoted on the Official List of the Stock Exchange. Loan Guarantee Scheme: a facility whereby banks are able to lend to firms that would not otherwise qualify for bank finance due to lack of track record, the loan being guaranteed by the Department of Trade and Industry. Management Buy-In (MBI): acquisition of an equity stake in an existing firm by new management that injects expertise as well as capital into the enterprise. Management Buy-Out (MBO): acquisition of an existing firm by its existing management usually involving substantial amounts of straight debt and mezzanine finance. Marginal Cost of Capital (MCC): the additional return required on incremental investment that is financed in a way that alters the firm’s capital structure. Marginal Efficiency of Investment (MEI): a schedule listing available investments, in declining order of attractiveness. Market Capitalisation: the market value of a firm’s equity, i.e. number of ordinary shares issued times market price. The Market Portfolio includes all securities traded on the stock market weighted by their respective capitalisations. Usually, a more limited portfolio such as the FT All Share Index is used as a proxy. Matching: offsetting a currency inflow in one currency, e.g. a stream of revenues, by a corresponding stream of costs, thus leaving only the profit element unmatched. Firms may also match operating cash flows against financial flows, e.g. a stream of interest and capital payments resulting from overseas borrowing in the same currency. Mergers: pooling by firms of their separate interests into newly-constituted business, each party participating on roughly equal terms. Mezzanine Finance covers hybrids such as convertibles that embody both debt and equity features. Modified Internal Rate of Return (MIRR): the internal rate of return modified for the reinvestment assumption. Modigliani &
Miller’s (MM) Capital Structure Theories are: Monetary Policy Committee: a body whose members are appointed by the Bank of England, responsible for setting UK interest rates at monthly meetings. Money Market Cover involves an exporter borrowing on the money market (i.e. creating a liability) in the same currency in which it expects to receive a payment. Moral Hazard: the temptation facing managers to engage in risky activities when they are protected from the consequences of failure, e.g. by guaranteed severance payments. Multilateral Netting: a central Treasury department operation to minimise net flows of currency throughout an organisation. Multi-National Company (MNC): one that conducts a significant proportion of its operations abroad. Natural Hedge: where the adverse impact of FX rate variations on cash inflows are offset by the effect on cash outflows, or vice versa. Net Advantage of a Lease (NAL): the NPV of the acquisition of an asset adjusted for financing benefits. Net Asset Value (NAV): the value of owners’ stake in a firm, found by deducting total liabilities (i.e. debts) from total assets. Net Debt: a firm’s net borrowing including both long-term and also short-term debt, offset by cash holdings. Expressed either in absolute terms, or in relation to owner’s equity. Net Present Value: the value of a stream of cash flows adjusted for the time-value of money. A positive NPV adds value. Netting: offsetting a firm’s internal currency inflows and outflows in the same currency to minimise the net flow in either direction. Neutral Stocks generate returns that vary by the same proportion as overall market returns. Their Betas equal 1.0. Also called ‘market-tracking’ investments. New Issue Market: the market for selling and buying newly-issued securities. It has no physical existence. Niche Companies serve a limited segment of their markets, usually offering high-quality, differentiated products at a high margin. Non-Recourse (as distinct from recourse) factoring operates where factors are unable to reclaim bad debts from a client’s accounts.
Official List: daily list of securities and prices traded on the London Stock Exchange. Operating Gearing is the importance of fixed expenses within a firm’s overall cost structure. It can be measured in various ways, for example, by looking at the responsiveness of operating profit to sales variations. Operating Gearing Factor: a ratio that compares the operating gearing of a particular activity, e.g. a product division within a larger firm to that of a larger entity such as the whole firm. Operating/Strategic Exposure: the risk that adverse foreign exchange rate movements will affect the present value of the firm’s future cash flows (effectively, long-term transactions exposure). Operating Lease: a method of hiring assets over periods less than the expected lifetime of those assets. Opportunity Cost: the value forgone by opting for a particular course of action. Optimal Capital Structure: the financing mix that minimises the overall cost of finance and maximises market value. Optimal Portfolio: the one chosen by an investor to achieve his/her most desired combination of risk and return. This choice depends on the investor’s attitude to risk, or risk–return preference, i.e. how he/she rates different combinations of risk and return. If a risk-free asset is available, the optimal portfolio of risky assets is the market portfolio. Options: the right but not the obligation to buy or sell something at some time in the future at a given price. Overdraft: short-term finance extended by banks subject to instant recall. A maximum deficit balance is pre-agreed and interest is paid on the actual daily balance outstanding. Overtrading: where a firm has insufficient long-term capital to finance business growth. Owner’s Equity: in accounting terms, simply the NAV, but can also be expressed in market value terms, i.e. share price times number of ordinary shares issued, or 'capitalisation’.
Parallel Matching applies where a firm offsets inflows in one currency with outflows denominated in a closely correlated currency. Perpetuity: an infinite series of cash flows. Poison Pill: a provision designed to damage the interests of a takeover bidder, e.g. handsome severance terms for departing managers, which is activated on completion of the bid. Political Risk: the risk of politically-motivated interference by a foreign government in the affairs of a MNC, that adversely affects its net cash flows. Portfolio: a combination of investments – securities or physical assets – into a single ‘bundled’ investment. A well-diversified portfolio has the potential capacity to lower the investor’s exposure to the risk of fluctuations in the overall economy. Portfolio Effect: the tendency for the risk on a well-diversified holding of investments to fall below the risk of most and sometimes, all of its individual components. Portfolio Investment: investment in paper claims such as ordinary shares, without obtaining a voice in management. Post-completion Audit: audit of a capital project at an agreed time following implementaion. Preference Shares: hybrid securities that rank ahead of ordinary shares for dividend payment, usually at a fixed rate, and also in distributing the proceeds of a liquidation. Normally, they carry no voting rights. Price:Earnings Ratio (PER): the current share price divided by the latest reported earnings (i.e. profits after tax) per share. Profitability index: ratio of the present value of benefits to costs. Project Risk Factor: the product of the Revenue Sensitivity Factor and the Operating Gearing Factor multiplied together. Proprietorial Companies are run by founders and their heirs to provide a livelihood for their families. They usually have limited growth aims. Provision: a notional deduction from profits to allow for some highly likely future financial contingency. In accounting terms, an appropriation of profit after taxation. A Proxy Beta is used when the firm has no market listing and thus no Beta of its own. It is taken from a comparable listed firm, and adjusted as necessary for relative financial gearing levels. Hence, Proxy Discount Rate. Purchasing Power Parity (PPP): the theory that foreign exchange rates are in equilibrium when they can purchase the same amount of goods at the prevailing exchange rate.
Random Walk Theory: share price movements are independent of each other so that tomorrow’s share price cannot be predicted by looking at today’s. Real Assets: assets in the business (tangible or intangible). Real Options: capital investment options rather than financial options. Record Day: the cut-off date beyond which further entrants to the shareholder register do not qualify for the next dividend. Relevant Risk: the component of total risk taken into account by the stock market when assessing the appropriate risk premium for determining capital asset values. Reserves: the funds that shareholders invest in a firm in addition to their initial subscription of capital. The Residual Theory of Dividends asserts that firms should only pay cash dividends when they have financed new investments. It assumes no access to external finance. Retained Earnings: reserves represented by retention of profits. Sometimes, labelled ‘profit & loss account’ on the Balance Sheet. Also called Revenue Reserves. Revenue Sensitivity: the extent to which revenue of an activity varies in response to general economic fluctuations. Revenue Sensitivity Factor: the revenue sensitivity of a particular activity, e.g. a product division, relative to that of a larger entity, such as the whole firm. A Revolving Credit Facility enables a firm to borrow up to a pre-specified amount usually over 1–5 years. As repayments of outstanding balances are made, the loan facility is replenished. Rights Issues: sales of further ordinary shares at less than market price to existing shareholders who are usually able to sell the rights on the market should they not wish to purchase additional shares. Risk-free Assets: securities with zero variation in overall returns. Risk Premium: the additional return demanded by investors above the risk-free rate to compensate for exposure to systematic risk.
Scale Economies: cost efficiencies, e.g. bulk-buying, due to increasing a firm’s size of operation. A Scrip Dividend is offered to investors in lieu of the equivalent cash payment. Also called a scrip alternative. SEAQ: a computer-based quotation system on the London Stock Exchange where market makers report bid and offer prices and trading volumes. Securitisation: the technique of packaging non-tradable claims into a traded security backed by an asset such as a flow of low risk income payments. Security Market Line (SML): an upward-sloping relationship tracing out all combinations of expected return and systematic risk, available in an efficient market. All traded securities locate on this schedule. In effect, the Capital Market Line adjusted for systematic risk. Sensitivity Analysis: analysis of the impact of changes in assumptions on investment returns. Share Buyback: repurchase by a firm of its existing shares, either via the market or by a tender to all shareholders. Shareholder Value Analysis (SVA): a way of assessing the inherent value of the equity in a company, taking into account the sources of value creation and the time horizon over which the firm enjoys competitive advantages over its rivals. Share Premium Account: a reserve set up to account for the issue of new shares at a price above their par value. Share Splits (USA: Stock Splits): a way of reducing the share price of ‘heavyweight’ shares (prices above £10). Achieved by reducing the par value of issued shares, e.g. two shares of par value 50p to replace one share at £1 is a one-for-one split, halving the share price. Short Selling: selling securities not yet owned in the expectation of being able to buy them later at a lower price. Signalling: using financial announcements to deliver more information than is actually spelt out in detail. Specific Risk: the variability in the return on a security due to exposure to risks relating to that security in isolation, e.g. risk of losing market share due to poor marketing decisions. Spot Rate: the rate of exchange quoted for transactions involving immediate settlement. Hence, spot market. Spread: the difference between the exchange rates (interest rates) at which banks buy and sell foreign exchange (lend and borrow). Straight, or Plain Vanilla, Debt: fixed rate borrowing with no additional features such as convertibility rights or warrants. Sunk Cost: a cost already incurred, or committed to. Synergies: gains in revenues or cost savings resulting from takeovers and mergers, not resulting from firm size, i.e. stemming from a ‘natural match’ between two sets of assets. Systematic Risk: variability in a security’s return due to exposure to risks affecting all firms traded in the market (hence, market risk), e.g. the impact of exchange rate changes.
Takeover: acquisition of the share capital of another firm, resulting in its identity being absorbed into that of the acquiror. Take over Code: the non-statutory rules laid down by the Take-Over Panel to guide the conduct of participants in the take-over process. Take over Panel: a non-statutory body set up by, and with the participation of, leading financial organisations to oversee the conduct of takeover bids. Tax Breaks: tax concessions, e.g. relief of interest payments against profits tax. Tax Credit: see Imputation System. Tax Shield: a method of sheltering profits from corporation tax. It is measured by the discounted value of future tax savings generated by the available tax reliefs. Theoretical Ex-Rights Price (TERP): the market price to which the ordinary shares should gravitate following the completion of a rights issue. Time-value of Money: the notion that money received in the future is worth less than the same amount received today. Total Shareholder Return (TSR): the overall return enjoyed by investors, including dividend and capital appreciation, expressed as a percentage of their initial investment. Related to individual years, or to a lengthier time period, and then converted into an annualised, or equivalent annual return. Trade Credit: temporary financing extended by suppliers of goods and services pending the customer settlement. Traditional Theory of Capital Structure: the theory that an optimal capital structure exists, where the WACC is minimised and market value is maximised. Transaction Exposure: the risk of loss due to adverse foreign exchange rate movements that affect the home currency value of import and export contracts denominated in a foreign currency. A Transfer Price: the cost applied to goods transferred between operating units owned by the same firm. Translation Exposure: the risk of loss from adverse foreign exchange movements that affect sterling values of Balance Sheet items held overseas and past transactions in foreign currency. Treasury Bills: short-dated (up to three months) securities issued by the Bank of England on behalf of the UK government to cover short-term financing needs. Unit Trust: investment business attracting funds from investors by issuing units of shares or bonds to invest in. Value-based management: a managerial approach where the whole aim, strategies and actions are linked to shareholder value creation. Venture Capital: finance, usually equity, offered by specialist merchant banks wanting to take a stake in firms with high growth potential, but involving a high risk of loss. Vertical Integration: extension of a firm’s activities further back, or forward, along the supply chain from existing activities.
Warrants: options to buy ordinary shares at a pre-determined ‘exercise price’. Usually attached to issues of loan stock. Weighted Average Cost of Capital (WACC): the overall return a firm must achieve in order to meet the requirements of all its investors. White Knight: a takeover bidder emerging after a hostile bid has been made, usually offering alternative bid terms that are more favourable to the defending management. Working Capital: current assets less current liabilities.
Back to the top Yield: income from a security as a percentage of market price. Yield Curve: a graph of the relationship between the yield on bonds and their current length of time to maturity. Z-score: a mathematically-derived critical value below which firms are associated with failure. Zero Coupon Bond: a bond that does not pay interest but is issued at a discount and redeemed at par (full) value.
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