Accounting Break-Even                             

The sales level that results in zero project net income.

Accounts Payable Period                           

The time between receipt of inventory and payment for it.

Accounts Receivable Financing                  

A secured short-term loan that involves either the assignment or factoring of receivables.

Accounts Receivable Period                       

The time between sale of inventory and collection of the receivable.

Adjusted Present Value (APV)                  

Base case net present value of a project's operating cash flows plus present value of any financing benefits.

Adjustment Costs                                      

The costs associated with holding too little cash. Also shortage costs.

Agency Problem                                        

The possibility of conflicts of interest between the stockholders and management of a firm.

Aggregation                                              

Process by which smaller investment proposals of each of a firm's operational units are added up and treated as one big project.

Aging Schedule                                         

A compilation of accounts receivable by the age of each account.

Amalgamations                                         

Combinations of firms that have been joined by merger, consolidation, or acquisition.

American Options                                     

A call or put option that can be exercised on or before its expiration date.

American Options                                     

A call or put option that can be exercised on or before its expiration date.

Annual Percentage Rate (APR)                 

The interest rate charged per period multiplied by the number of periods per year.

Annuity                                                    

A level stream of cash flows for a fixed period of time.

Annuity Due                                             

Annuity contract specification of payments at the beginning of each period.

Arbitrage Pricing Theory (APT)                

An equilibrium asset pricing theory that is derived from a factor model by using diversification and arbitrage. It shows that the expected return on any risky asset is a linear combination of various factors.

Average Accounting Return (AAR)           

An investment's average net income divided by its average book value.

Average Tax Rate                                      

Total taxes paid divided by total taxable income.

Balance Sheet                                            

Financial statement showing a firm's accounting value on a particular date.

Bankruptcy                                               

A legal proceeding for liquidating or reorganizing a business. Also, the transfer of some or all of a firm's assets to its creditors.

Bearer Form                                             

Bond issued without record of the owner's name; payment is made to whoever holds the bond.

Belgian Dentist                                          

Stereotype of the traditional Eurobond investor as a professional who must report income, has a disdain for tax authorities, and likes to invest in foreign currencies.

Benefit/Cost Ratio                                     

The profitability index of an investment project.

Best Efforts Underwriting                         

Underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility.

Beta Coefficient                                        

Amount of systematic risk present in a particular risky asset relative to an average risky asset.

Bond Refunding                                        

The process of replacing all or part of an issue of outstanding bonds.

Bought Deal                                              

One underwriter buys securities from an issuing firm and sells them directly to a small number of investors.

Business Risk                                            

The equity risk that comes from the nature of the firm's operating activities.

Call Option                                               

The right to buy an asset at a fixed price during a particular time period.

Call Option                                               

The right to buy an asset at a fixed price during a particular time period.

Call Premium                                            

Amount by which the call price exceeds the par value of the bond.

Call Protected                                           

Bond during period in which it cannot be redeemed by the issuer.

Call Provision                                           

Agreement giving the corporation the option to repurchase the bond at a specified price before maturity.

Canada Plus Call                                      

Call provision which compensates bond investors for interest differential making call unattractive for issuer.

Canada Yield Curve                                  

A plot of the yields on Government of Canada bonds relative to maturity.

Capital Asset Pricing Model (CAPM)        

Equation of the SML showing relationship between expected return and beta.

Capital Budgeting                                     

The process of planning and managing a firm's investment in fixed assets.

Capital Cost Allowance (CCA)                  

Depreciation method under Canadian tax law allowing for the accelerated write-off of property under various classifications.

Capital Cost Allowance (CCA)                  

Depreciation method under Canadian tax law allowing for the accelerated write-off of property under various classifications.

Capital Gains                                            

The increase in value of an investment over its purchase price.

Capital Gains Yield                                   

The dividend growth rate or the rate at which the value of an investment grows.

Capital Intensity Ratio                              

A firm's total assets divided by its sales, or the amount of assets needed to generate $1 in sales.

Capital Markets                                        

Financial markets where long-term debt and equity securities are bought and sold.

Capital Rationing                                     

The situation that exists if a firm has positive NPV projects but cannot find the necessary financing.

Capital Structure                                      

The mix of debt and equity maintained by a firm.

Captive Finance Company                        

Wholly owned subsidiary that handles credit extension and receivables financing through commercial paper.

Carrying Costs                                          

Costs that rise with increases in the level of investment in current assets.

Cash Break-even                                       

The sales level where operating cash flow is equal to zero.

Cash Budget                                             

A forecast of cash receipts and disbursements for the next planning period.

Cash Cycle                                                

The time between cash disbursement and cash collection.

Cash Discount                                           

A discount given for a cash purchase.

Cash Flow from Assets                              

The total of cash flow to bondholders and cash flow to stockholders, consisting of the following: operating cash flow, capital spending, and additions to net working capital.

Cash Flow Time Line                                

Graphical representation of the operating cycle and the cash cycle.

Cash Flow to Creditors                             

A firm's interest payments to creditors less net new borrowings.

Cash Flow to Shareholders                        

Dividends paid out by a firm less net new equity raised.

CCA Tax Shield                                        

Tax saving that results from the CCA deduction, calculated as depreciation multiplied by the corporate tax rate.

Circular Bid                                              

Corporate takeover bid that is communicated to the stockholders by direct mail.

Clientele Effect                                         

Stocks attract particular groups based on dividend yield and the resulting tax effects.

Collection Policy                                       

Procedures followed by a firm in collecting accounts receivable.

Common Stock                                          

Equity without priority for dividends or in bankruptcy.

Common-Base-Year Statement                  

A standardized financial statement presenting all items relative to a certain base year amount.

Common-Size Statement                            

A standardized financial statement presenting all items in percentage terms. Balance sheets are shown as a percentage of assets and income statements as a percentage of sales.

Compound Interest                                   

Interest earned on both the initial principal and the interest reinvested from prior periods.

Compounding                                           

The process of accumulating interest in an investment over time to earn more interest.

Consol                                                      

A perpetual bond.

Consolidation                                            

A merger in which an entirely new firm is created and both the acquired and acquiring firm cease to exist.

Contingency Planning                               

Taking into account the managerial options implicit in a project.

Control Block                                           

An interest controlling 50 percent of outstanding votes plus one; thereby it may decide the fate of the firm.

Conversion Premium                                 

Difference between the conversion price and the current stock price divided by the current stock price.

Conversion Price                                       

The dollar amount of a bond's par value that is exchangeable for one share of stock.

Conversion Ratio                                      

The number of shares per $1,000 bond received for conversion into stock.

Conversion Value                                      

The value of a convertible bond if it was immediately converted into common stock.

Convertible Bond                                      

A bond that can be exchanged for a fixed number of shares of stock for a specified amount of time.

Corporate Governance                              

Rules and practices relating to how corporations are governed by management, directors, and shareholders.

Corporation                                              

A business created as a distinct legal entity owned by one or more individuals or entities.

Cost of Capital                                          

The minimum required return on a new investment.

Cost of Debt                                              

The return that lenders require on the firm's debt.

Cost of Equity                                           

The return that equity investors require on their investment in the firm.

Counterparty                                            

Second borrower in currency swap. Counterparty borrows funds in currency desired by principal.

Coupon Rate                                             

The annual coupon divided by the face value of a bond.

Coupons                                                   

The stated interest payments made on a bond.

Covenants                                                 

A promise by the firm, included in the debt contract, to perform certain acts. A restrictive covenant imposes constraints on the firm to protect the interests of the debtholder.

Credit Analysis                                         

The process of determining the probability that customers will or will not pay.

Credit Cost Curve                                     

Graphical representation of the sum of the carrying costs and the opportunity costs of a credit policy.

Credit Instrument                                     

The evidence of indebtedness.

Credit Period                                            

The length of time that credit is granted.

Credit Scoring                                          

The process of quantifying the probability of default when granting consumer credit.

Cross-Hedging                                          

Hedging an asset with contracts written on a closely related, but not identical, asset.

Cross-Rate                                                

The implicit exchange rate between two currencies (usually non-U.S.) quoted in some third currency (usually the U.S. dollar).

Cumulative Voting                                    

Procedure where a shareholder may cast all votes for one member of the board of directors.

Date of Payment                                       

Date on the dividend cheques.

Date of Record                                          

Date on which holders of record are designated to receive a dividend.

Debenture                                                 

Unsecured debt, usually with a maturity of 10 years or more.

Debit Card                                                

An automated teller machine card used at the point of purchase to avoid the use of cash. As this is not a credit card, money must be available in the user's bank account.

Debt Capacity                                           

The ability to borrow to increase firm value.

Declaration Date                                       

Date on which the board of directors passes a resolution to pay a dividend.

Default Risk Premium                               

The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.

Deferred Call                                            

Call provision prohibiting the company from redeeming the bond before a certain date.

Degree of Operating Leverage                   

The percentage change in operating cash flow relative to the percentage change in quantity sold.

Demutualization                                        

The legal process of a life insurance company shifting from mutual ownership by policyholders to shareholder ownership.

Derivative Securities                                  

Securities whose returns depend on the price of an underlying asset and that allow market participants to offset the exposure of their cash market positions.

Derivative Securities                                  

Securities whose returns depend on the price of an underlying asset and that allow market participants to offset the exposure of their cash market positions.

Dilution                                                    

Loss in existing shareholders' value, in either ownership, market value, book value, or EPS.

Direct Bankruptcy Costs                           

The costs that are directly associated with bankruptcy, such as legal and administrative expenses.

Discount                                                   

Calculate the present value of some future amount.

Discount Rate                                           

The rate used to calculate the present value of future cash flows.

Discounted Cash Flow (DCF) Valuation    

The process of valuing an investment by discounting its future cash flows.

Discounted Payback Period                       

The length of time required for an investment's discounted cash flows to equal its initial cost.

Distribution                                              

Payment made by a firm to its owners from sources other than current or accumulated earnings.

Diversification                                           

Investment in more than one asset, whose returns do not move proportionally in the same direction at the same time thus reducing risk.

Dividend Capture                                     

A strategy in which an investor purchases securities to own them on the day of record and then quickly sells them; designed to attain dividends but avoid the risk of a lengthy hold.

Dividend Growth Model                            

Model that determines the current price of a stock as its dividend next period, divided by the discount rate less the dividend growth rate.

Dividend Payout Ratio                              

Amount of cash paid out to shareholders divided by net income.

Dividend Tax Credit                                 

Tax formula that reduces the effective tax rate on dividends.

Dividend Yield                                          

A stock's cash dividend divided by its current price.

Dividends                                                  

Payment made out of a firm's earnings to its owners, either in the form of cash or stock.

Dividends                                                  

Payment made out of a firm's earnings to its owners, either in the form of cash or stock.

Du Pont Identity                                       

Popular expression breaking ROE into three parts: profit margin, total asset turnover, and financial leverage.

Earnings Per Share                                   

Net income minus any cash dividends on preferred stock, divided by the number of shares of common stock outstanding.

Economic Exposure                                   

Long-term financial risk arising from permanent changes in prices or other economic fundamentals.

Economic Value Added (EVA)                   

Performance measure based on WACC.

Effective Annual Rate (EAR)                    

The interest rate expressed as if it were compounded once per year.

Efficient Capital Market                           

Market in which security prices reflect available information.

Efficient Markets Hypothesis (EMH)         

The hypothesis is that actual capital markets, such as the TSE, are efficient.

Equivalent Annual Cost (EAC)                 

The present value of a project's costs calculated on an annual basis.

Erosion                                                     

The cash flows of a new project that come at the expense of a firm's existing projects.

Eurobanks                                                

Banks that make loans and accept deposits in foreign currencies.

Eurobond                                                 

International bonds issued in multiple countries but denominated in a single currency (usually the issuer's currency).

Eurocurrency                                            

Money deposited in a financial centre outside of the country whose currency is involved.

Ex Rights                                                  

Period when stock is selling without a recently declared right, normally beginning four business days before the holder-of-record date.

Exchange Rate                                          

The price of one country's currency expressed in another country's currency.

Exchange Rate Risk                                  

The risk related to having international operations in a world where relative currency values vary.

Ex-Dividend Date                                      

Date two business days before the date of record, establishing those individuals entitled to a dividend.

Exercising the Option                                

The act of buying or selling the underlying asset via the option contract.

Expected Return                                       

Return on a risky asset expected in the future.

Expiration Date                                        

The last day on which an option can be exercised.

Face Value                                                

The principal amount of a bond that is repaid at the end of the term. Also par value.

Financial Break-even                                

The sales level that results in a zero NPV.

Financial Distress Costs                             

The direct and indirect costs associated with going bankrupt or experiencing financial distress.

Financial Engineering                               

Creation of new securities or financial processes.

Financial Lease                                         

Typically, a longer-term, fully amortized lease under which the lessee is responsible for upkeep. Usually not cancellable without penalty.

Financial Ratios                                        

Relationships determined from a firm's financial information and used for comparison purposes.

Financial Risk                                           

The equity risk that comes from the financial policy (i.e., capital structure) of the firm.

Firm Commitment Underwriting               

Underwriter buys the entire issue, assuming full financial responsibility for any unsold shares.

Fisher Effect                                             

Relationship between nominal returns, real returns, and inflation.

Five Cs of Credit                                       

The following five basic credit factors to be evaluated: character, capacity, capital, collateral, and conditions.

Fixed Costs                                               

Costs that do not change when the quantity of output changes during a particular time period.

Float                                                         

The difference between book cash and bank cash, representing the net effect of cheques in the process of clearing.

Forecasting Risk                                       

The possibility that errors in projected cash flows lead to incorrect decisions.

Foreign Bonds                                           

International bonds issued in a single country, usually denominated in that country's currency.

Foreign Exchange Market                         

The market where one country's currency is traded for another's.

Forward Contract                                     

A legally binding agreement between two parties calling for the sale of an asset or product in the future at a price agreed upon today.

Forward Exchange Rate                            

The agreed-on exchange rate to be used in a forward trade.

Forward Trade                                         

Agreement to exchange currency at some time in the future.

Free Cash Flow                                         

Another name for cash flow from assets.

Future Value (FV)                                    

The amount an investment is worth after one or more periods. Also compound value.

Futures Contracts                                     

An agreement drawn up for a fixed settlement date and price to deliver or receive an asset at a future date.

Generally Accepted Accounting Principles (GAAP)     

The common set of standards and procedures by which audited financial statements are prepared.

Gilts                                                         

British and Irish government securities, including issues of local British authorities and some overseas public-sector offerings.

Going-Private Transactions                       

All publicly owned stock in a firm is replaced with complete equity ownership by a private group.

Greenmail                                                 

A targeted stock repurchase where payments are made to potential bidders to eliminate unfriendly takeover attempts.

Growing Annuity                                      

A finite number of growing annual cash flows.

Growing Perpetuity                                  

A constant stream of cash flows without end that is expected to rise indefinitely.

Half-year Rule                                          

CCRA's requirement to figure CCA on only one half of an asset's installed cost for its first year of use.

Hard Rationing                                         

The situation that occurs when a business cannot raise financing for a project under any circumstances.

Hedging                                                    

A protective manoeuvre; a transaction intended to reduce the risk of loss from price fluctuations.

Holder-of-Record Date                              

The date on which existing shareholders on company records are designated as the recipients of stock rights. Also the date of record.

Homemade Dividends                                

Idea that individual investors can undo corporate dividend policy by reinvesting dividends or selling shares of stock.

Homemade Leverage                                 

The use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed.

Income Statement                                      

Financial statement summarizing a firm's performance over a period of time.

Incremental Cash Flows                            

The difference between a firm's future cash flows with a project and without the project.

Indenture                                                  

Written agreement between the corporation and the lender detailing the terms of the debt issue.

Indirect Bankruptcy Costs                         

The difficulties of running a business that is experiencing financial distress.

Inflation Premium                                     

The portion of a nominal interest rate that represents compensation for expected future inflation.

Information Content Effect                       

The market's reaction to a change in corporate dividend payout.

Initial Public Offering (IPO)                     

A company's first equity issue made available to the public. Also an unseasoned new issue.

Interest on Interest                                    

Interest earned on the reinvestment of previous interest payments.

Interest Rate Parity (IRP)                         

The condition stating that the interest rate differential between two countries is equal to the difference between the forward exchange rate and the spot exchange rate.

Interest Rate Risk Premium                       

The compensation investors demand for bearing interest rate risk.

Interest Tax Shield                                    

The tax saving attained by a firm from interest expense.

Internal Growth Rate                                

The growth rate a firm can maintain with only internal financing.

Internal Rate of Return (IRR)                   

The discount rate that makes the NPV of an investment zero.

International Fisher Effect (IFE)               

The theory that real interest rates are equal across countries.

Intrinsic Value                                          

The lower bound of an option's value, or what the option would be worth if it were about to expire.

Inventory Loan                                         

A secured short-term loan to purchase inventory.

Inventory Period                                       

The time it takes to acquire and sell inventory.

Invoice                                                      

Bill for goods or services provided by the seller to the purchaser.

Just-in-Time Inventory (JIT)                     

Design for inventory in which parts, raw materials, and other work-in-process is delivered exactly as needed for production. Goal is to minimize inventory.

Lessee                                                       

The user of an asset in a leasing agreement. Lessee makes payments to lessor.

Lessor                                                       

The owner of an asset in a leasing agreement. Lessor receives payments from the lessee.

Letter of Credit                                         

A written statement by a bank that money will be paid, provided conditions specified in the letter are met.

Leveraged Buyouts (LBO)                         

Going-private transactions in which a large percentage of the money used to buy the stock is borrowed. Often, incumbent management is involved.