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					Ch#   Term                           Definition
1     finance                        The knowledge, science, techniques, and art of managing money.
                                     (p. 2)
1     financial markets              Provide a forum where savers of funds and users of funds can
                                     transact business. (p. 4)
1     financial institutions         Intermediaries that allow for the efficient transfer of the savings of
                                     individuals, governments, and business for financial securities. (p.
                                     4)
1     financial services             The part of finance concerned with design and delivery of advice
                                     and financial products to individuals, business, and government. (p.
                                     5)
1     corporate finance              Concerns the duties of the financial manager in the business firm.
                                     (p. 5)
1     financial manager              Actively manages the financial affairs of any type of business,
                                     whether financial or nonfinancial, private or public, large or small,
                                     profit-seeking or not-for-profit. (p. 5)
1     publicly traded company        A company whose common shares are listed and trade on a
                                     recognized stock exchange. (p. 7)
1     sole proprietorship            A business owned by one person and operated for his or her own
                                     benefit. (p. 7)
1     unlimited liability            The condition of a sole proprietorship (or general partnership)
                                     allowing the owner’s total wealth to be taken to repay creditors. (p.
                                     7)
1     partnership                    A business owned by two or more people and operated for profit.
                                     (p. 8)
1     partnership agreement          The written contract used to formally establish a business
                                     partnership. (p. 9)
1     limited partnership            A partnership with one or more general partners with unlimited
                                     liability and one or more limited partners with limited liability. (p.
                                     9)
1     corporation                    A business entity created by law (often called a "legal entity”). (p.
                                     9)
1     shareholders                   The owners of a corporation, whose ownership or "equity” is
                                     evidenced by <I>common shares</I>. (p. 9)
1     common shares                  The purest and most basic form of corporate ownership. (p. 9)

1     dividends                      Periodic distributions of earnings to the shareholders of a firm. (p.
                                     9)
1     board of directors             Group elected by the firm’s shareholders and having ultimate
                                     authority to guide corporate affairs and set corporate strategy. (p. 9)
1     president or chief executive   Corporate official responsible for managing the firm’s day-to-day
      officer (CEO)                  operations and carrying out the policies established by the board of
                                     directors. (p. 10)
1     income trust                   Created through the conversion of a regular corporation to a trust
                                     structure, where the business becomes a different type of legal
                                     entity; the benefit is a significant reduction in taxes. (p. 11)
1     S&P/TSX Composite Index        The measure of how the Canadian stock market has done over a
                                     stated time period, which might be a day, a week, a month, a year,
                                     or a number of years. (p. 12 )
1     treasurer                      The officer responsible for the firm’s financial activities such as
                                     financial planning and fund raising, making capital expenditure
                                     decisions, and managing cash, credit, the pension fund, and foreign
                                     exchange. (p. 14)
1     controller                     The officer responsible for the firm’s accounting activities, such as
                                     corporate accounting, tax management, financial accounting, and
                               cost accounting. (p. 14)
1   foreign exchange manager   The manager responsible for monitoring and managing the firm’s
                               exposure to loss from currency fluctuations. (p. 15)

1   marginal analysis          Economic principle that states that financial decisions should be
                               made and actions taken only when the added benefits exceed the
                               added costs. (p. 15)
1   accrual basis              Recognizes sales revenue at the time of sale and the expenses
                               incurred to generate the sales. (p. 16)
1   cash basis                 Recognizes revenues and expenses only with respect to actual
                               inflows and outflows of cash. (p. 16)
1   capital structure          The mix of short- and long-term financing and the mix of debt and
                               equity financing used by a company. (p. 18)
1   earnings per share (EPS)   The amount earned during the accounting period on each
                               outstanding common share, calculated by dividing the period’s
                               total earnings available for the firm’s common shareholders by the
                               number of common shares outstanding. (p. 20)
1   risk                       The chance that actual outcomes may differ from those expected.
                               (p. 21)
1   economic value added       EVA, a way to measure the value of a company, is the difference
    (EVA)                      between a company’s net operating profit after tax and the total
                               cost of invested capital. (p. 22)
1   stakeholders               Groups such as employees, customers, suppliers, creditors, owners,
                               communities, and others who have a direct economic link to the
                               firm. (p. 24)
1   ethics                     Standards of conduct or moral judgment. (p. 26)

1   agency problem             The likelihood that managers may place personal goals ahead of
                               corporate goals. (p. 29)
1   corporate governance       The set of actions and procedures common shareholders use to
                               ensure they receive a reasonable return on their investment in the
                               company. (p. 30)
1   agency costs               The reduction in shareholders’ wealth due to the agency problem.
                               (p. 30)
1   incentive plans            Management compensation plans that tend to tie management
                               compensation to share price; most popular incentive plan involves
                               the grant of <I>stock option</I>s. (p. 32)
1   stock options              An incentive allowing managers to purchase common shares at the
                               market price set at the time of the grant. (p. 32)
1   performance plans          Plans that compensate managers on the basis of proven
                               performance measured by EPS, growth in EPS, and other ratios of
                               return. <I>Performance shares</I> and/or cash <I>bonuses</I>
                               are used as compensation under these plans. (p. 32)
1   performance shares         Common shares granted to management for meeting stated
                               performance goals. (p. 32)
1   cash bonuses               Cash paid to management for achieving certain performance goals.
                               (p. 33)
1   hostile takeover           The acquisition of the firm (the <I>target</I>) by another firm or
                               group (the <I>acquirer</I>) that is not supported by management.
                               (p. 34)
1   financial forecasting      The process used to estimate a company’s requirement for
                               financing for a future time period. (p. 36)
1   money market               The market where debt securities that will mature within one year
                               are traded. (p. 37)
1   capital market             The market that trades long-term debt securities and common and
                               preferred equity securities. (p. 37)
1   primary market             The market where financial securities are initially issued and where
                               the issuer receives the proceeds from the sale of the financial
                               security. (p. 37)
1   secondary market           The market that allows the owner of a previously created financial
                               security to sell this security or to buy more of this or other
                               securities, or allows a buyer to express an interest in acquiring a
                               financial security. (p. 37)
1   stock exchange             An actual, physical secondary market that allows investors to buy
                               and sell preferred and common shares. (p. 37)
1   risk&#151return tradeoff   The return expected depends on the amount of risk taken. (p. 37)

1   risk-averse                The attitude toward risk in which a higher return would be
                               expected if risk increased. (p. 37)
1   required rate of return    The minimum return required given the risk of an investment; the
                               greater the risk of loss, the greater the required return. (p. 37)
1   interest                   The return paid on debt financing. (p. 38)
1   interest rate              The cost of money. The greater the risk of the debt security, the
                               higher the interest rate. (p. 38)
1   cost of capital            The overall cost to a company of a mix of debt and common equity
                               financing. (p. 38)
1   capital budgeting          The process of analyzing the investment in assets with an expected
                               life greater than one year. (p. 38)
2   Canadian Institute of      Sets accounting, auditing, and assurance standards for business,
    Chartered Accountants      not-for-profit organizations, and government, and represents the
    (CICA)                     CA profession in Canada. (p. 46)


2   generally accepted         The accounting practices, procedures, and standards used to
    accounting principles      maintain financial records, reports, and statements. (p. 46)
    (GAAP)

2   Accounting Standards       The accounting profession’s rule-setting body, part of the CICA,
    Board (AcSB)               that authorizes the generally accepted accounting principles
                               (GAAP) used in Canada. (p. 46)
2   amortization               The systematic expensing of a portion of the cost of a fixed asset
                               against sales. (p. 47)
2   balance sheet              Summary statement of the firm’s financial position at a given point
                               in time. (p. 49)
2   current assets             Short-term assets, expected to be converted into cash within 1 year
                               or less. (p. 49)
2   current liabilities        Short-term liabilities, expected to be paid within 1 year or less. (p.
                               49)
2   intangible assets          Assets that cannot be seen or touched, but are valuable to a
                               company. (p. 51)
2   goodwill                   The amount paid for a business in excess of the value of the assets
                               acquired. (p. 51)
2   stated value               The actual value of preferred shares when originally sold to
                               investors. (p. 52)
2   common equity              The total investment made by the company’s owners consisting of
                               the value of common shares plus retained earnings. (p. 52)
2   common shares              The total proceeds received from the sale of common shares since
                               the company was formed. (p. 52)
2   retained earnings          The running total of all earnings, net of dividends, that have been
                               retained and reinvested in the firm since its inception. (p. 52)
2   book value                    The total value of common equity at the date of the balance sheet.
                                  (p. 52)
2   statement of retained         Details the change in retained earnings from the beginning to the
    earnings                      end of the fiscal year. (p. 53)

2   statement of cash flows       Provides a summary of the firm’s operating, investment, and
    (SCF)                         financing cash flows and reconciles them with changes in its cash
                                  and marketable securities during the period of concern. (p. 54)
2   operating flows               Cash flows directly related to production and sale of the firm’s
                                  products and services. (p. 54)




2   investment flows              Cash flows associated with purchase and sale of both fixed assets
                                  and business interests. (p. 55)
2   financing flows               Cash flows that result from debt and equity financing transactions;
                                  include issue and repayment of debt, cash inflow from the sale of
                                  stock, and cash outflows to pay cash dividends or repurchase stock.
                                  (p. 55)
2   active business income        Income derived from normal business activities of a corporation;
                                  the difference between sales and expenses. (p. 66)
2   passive income                Income from a specified investment business or from a personal
                                  services business that is taxed at higher corporate tax rates. (p. 66)
2   intercorporate dividends      Dividends received by a corporation from investments in preferred
                                  and common shares held in other corporations. (p. 66)
2   capital gains                 The positive difference between the selling price of a capital asset
                                  and the asset’s original cost plus the costs incurred to sell the asset.
                                  (p. 67)
2   capital assets                A fixed asset that is amortized, land, or financial assets (common
                                  shares, preferred shares, and fixed income securities like bonds)
                                  held by a corporation. (p. 67)
2   taxable capital gain          The portion of the capital gain that is taxable; currently the taxable
                                  portion is 50 percent. (p. 67)
2   net capital gains             The difference between capital gains and losses for a tax year; 50
                                  percent of this amount is taxable. (p. 67)
2   CCA rates                     Rates set by the Canada Revenue Agency (CRA) that are used to
                                  calculate the CCA on an asset class; the rates range from 4 to 100
                                  percent. (p. 72)
2   undepreciated capital cost    The undepreciated value of an asset or asset class that is the basis
    (UCC)                         for the amount of CCA that is claimed; also referred to as the
                                  <I>book value</I> of an asset. (p. 72)
2   investment tax credit (ITC)   An incentive for businesses in various regions of the country to
                                  purchase certain types of fixed assets or undertake certain types of
                                  research and development activities; results in a reduction in
                                  federal taxes payable. (p. 77)
2   Canadian-controlled private   A small, private business majority-owned by Canadian residents.
    corporation (CCPC)            (p. 79)

2   general rate reduction        The deduction that most corporations are allowed from the net
                                  federal tax rate of 28 percent. (p. 79)
2   small business deduction      A 16. 5 percent reduction in the net federal tax rate that the federal
                                  government allows CCPCs. (p. 81)
2   annual report                 The report that corporations must provide to common shareholders
                                  that summarizes and documents the firm’s financial activities
                                  during the past year. (p. 82)
2   letter to shareholders        Typically, the first element of the annual report following a
                                  summary of the company’s financial performance for the year, and
                                  the direct communication from senior management to the firm’s
                                  owners. (p. 82)
2   Management’s Discussion       MD&A is a supplemental report that allows the reader to look at
    and Analysis (MD&A)           the company through the eyes of management by providing a
                                  current and historical analysis of the business of the company. (p.
                                  84)
3   ratio analysis                Involves the methods of calculating and interpreting financial ratios
                                  to assess the firm’s performance. (p. 111)
3   liquidity                     A firm’s ability to satisfy its short-term obligations <I>as they
                                  come due</I>. (p. 116)
3   net working capital           A measure of liquidity calculated by subtracting current liabilities
                                  from current assets. (p. 116)
3   current ratio                 A measure of liquidity calculated by dividing the firm’s current
                                  assets by its current liabilities. (p. 116)
3   quick (acid-test) ratio       A measure of liquidity calculated by dividing the firm’s current
                                  assets minus inventory by current liabilities. (p. 117)
3   activity ratios               Measure the company’s effectiveness at managing accounts
                                  receivable, inventory, accounts payable, fixed assets, and total
                                  assets. (p. 118)
3   inventory turnover            The average number of times a company turns over (sells) their
                                  complete stock of inventory in a year. (p. 119)
3   average age of inventory      Measures the effectiveness of the company’s management of
                                  inventory; it is the average length of time inventory is held by the
                                  company. (p. 120)
3   average collection period     The average amount of time needed to collect accounts receivable.
                                  (p. 121)
3   average payment period        The average amount of time needed to pay accounts payable. (p.
                                  122)
3   fixed asset turnover          Indicates the efficiency with which the firm uses its net fixed assets
                                  to generate sales. (p. 123)
3   total asset turnover          Indicates the efficiency with which the firm uses its assets to
                                  generate sales. (p. 123)
3   capitalization ratios         Show how a firm has financed the investment in assets. There are
                                  three alternatives: debt, preferred equity, and common equity. (p.
                                  125)
3   coverage ratios               Measure the firm’s ability to service the sources of financing. (p.
                                  125)
3   debt ratio                    Measures the proportion of total assets financed by the firm’s
                                  creditors. (p. 125)
3   preferred equity ratio        Measures the proportion of total assets financed by preferred
                                  shareholders. (p. 126)
3   common equity ratio           Measures the proportion of total assets financed by common
                                  shareholders. (p. 126)
3   costly debt ratio             Measures the proportion of total assets financed by costly forms of
                                  debt financing. (p. 126)
3   debt/equity ratio             Measures the proportion of long-term debt to common equity. (p.
                                  127)
3   times interest earned ratio   Sometimes called the <I>interest coverage ratio</I>, it measures
                                  the firm’s ability to make contractual interest payments. (p. 127)
3   fixed-charge coverage ratio   Measures the firm’s ability to meet all fixed-payment obligations.
                                  (p. 128)
3   common-size income            An income statement in which each item is expressed as a
    statement                     percentage of sales. (p. 130)

3   gross margin                  Measures the percentage of each sales dollar remaining after the
                                  firm has paid the direct costs of the products sold (COGS). (p. 130)
3   operating margin              Measures the percent of each sales dollar remaining after all
                                  expenses associated with producing and selling the product and
                                  operating the company are deducted. (p. 130)
3   profit margin                 Measures the percentage of each sales dollar remaining after all
                                  expenses, including financing expenses and taxes, have been
                                  deducted. (p. 130)
3   return on total assets        Measures the firm’s overall effectiveness in generating profits with
    (ROA)                         its available assets; also called the <I>return on investment (ROI)
                                  </I>. (p. 130)
3   return on equity (ROE)        Measures the return earned on the owners’ investment in the firm.
                                  (p. 132)
3   price/earnings (P/E) ratio    Measures the amount investors are willing to pay for each dollar of
                                  the firm’s earnings; the higher the P/E ratio, the greater the investor
                                  confidence. (p. 133)
3   DuPont model                  A method used to analyze the key measure of profitability from a
                                  shareholder’s perspective: return on equity (ROE). (p. 134)
3   leverage                      The advantage gained by using a lever. (p. 137)

3   financial leverage            The use of debt financing to acquire assets. (p. 137)
3   cross-sectional ratio         Comparison of one company’s ratios to another company’s or
    analysis                      group of companies’ ratios calculated for the same time period;
                                  industry average ratios are often used. (p. 141)
3   benchmarking                  A type of <I>cross-sectional analysis</I> in which the firm’s
                                  ratio values are compared to those of a key competitor or group of
                                  competitors, primarily to identify areas for improvement. (p. 142)
3   time-series analysis          Evaluation of the firm’s financial performance over time using
                                  financial ratio analysis. (p. 144)
4   pro forma statements          Projected, or forecasted, financial statements: the income statement
                                  and the balance sheet. (p. 176)
4   financial planning process    Planning that begins with long-term (strategic) financial plans that
                                  in turn guide the formulation of short-term (operating) plans and
                                  budgets. (p. 176)
4   long-term (strategic)         Planned financial actions and the anticipated financial impact of
    financial plans               those actions over periods ranging from 2 to 10 years. (p. 176)

4   short-term (operating)        Planned short-term financial actions and the anticipated impact of
    financial plans               those actions. (p. 177)

4   cash budget (cash forecast)   A statement of the firm’s planned inflows and outflows of cash that
                                  is used to estimate its short-term cash requirements. (p. 178)
4   sales forecast                The prediction of the firm’s sales over a given period, based on
                                  external and internal data, and used as the key input to the financial
                                  planning process. (p. 178)
4   external forecast             A sales forecast based on the relationships observed between the
                                  firm’s sales and certain key external economic indicators. (p. 179)
4   internal forecast             A sales forecast based on a buildup, or consensus, of forecasts
                                  through the firm’s own sales channels. (p. 179)
4   cash receipts              All of a firm’s inflows of cash in a given financial period. (p. 180)

4   cash disbursements         All outlays of cash by the firm during a given financial period. (p.
                               181)
4   net cash flow              The mathematical difference between the firm’s cash receipts and
                               its cash disbursements in each period. (p. 183)
4   ending cash                The sum of the firm’s beginning cash and its net cash flow for the
                               period. (p. 183)
4   required total financing   Amount of funds needed by the firm if the ending cash for the
                               period is less than the desired minimum cash balance; typically
                               represented by a line of credit. (p. 183)
4   excess cash balance        The (excess) amount available for investment by the firm if the
                               period’s ending cash is greater than the desired minimum cash
                               balance; assumed to be invested in marketable securities. (p. 183)
4   percent-of-sales method    A method of developing the pro forma income statement that
                               assumes all expenses remain the same percent of sales in the
                               forecast year as they were in the most recent fiscal year. (p. 192)
4   dividend payout ratio      The percent of NIAT (or earnings available to common
                               shareholders) that is paid out to common shareholders as dividends
                               during the year. (p. 192)
4   spontaneous sources of     The increases in accounts payable and accruals that will occur as
    financing                  inventory and other direct costs of production increase with sales,
                               an internal source of financing for the company. (p. 193)
4   total financing required   The change in total assets from the latest fiscal year to the forecast
                               year. (p. 194 )
4   statement of external      The forecasted statement that shows the difference between total
    financing required         financing required and the two internal sources of financing,
                               providing the amount of external financing required. (p. 195)
4   capital intensity ratio    The dollar amount of assets needed for each $1 increase in sales;
                               the larger the number, the more capital-intensive the company, and
                               therefore the higher the amount of financing required. (p. 198 )
4   judgmental approach        A method for developing the pro forma balance sheet in which the
                               values of certain balance sheet accounts are estimated, and others
                               are calculated, based on a ratio analysis. (p. 203)
5   institutional investors    Financial intermediaries such as mutual funds, pension funds, and
                               life insurance companies. (p. 236)
5   mutual funds               Investment companies that receive cash from individuals for
                               investment in both money and capital market securities. (p. 236)
5   pension funds              Investment entities established by employers to provide a pension
                               to employees during retirement. (p. 237)
5   life insurance companies   Invest premiums from life insurance policyholders to ensure
                               sufficient funds are available to pay out the stated value of the life
                               insurance policy upon the death of the policyholder. (p. 237)
5   Bank of Canada             The central bank in Canada whose main function is to manage
                               monetary policy. (p. 237)
5   Bank Rate                  The interest rate the Bank of Canada charges on one-day loans to
                               financial institutions (chartered banks and investment dealers) as
                               the lender of last resort. (p. 244)
5   overnight rate             The average interest rate the Bank of Canada wants financial
                               institutions to use when they lend each other money for one day, or
                               “overnight." (p. 244)
5   operating band             A band, one-half of a percentage point wide, with the overnight
                               rate at the centre and the bank rate at the top. (p. 244)
5   short-dated bonds          Long-term government bonds that are approaching maturity. (p.
                               245)
5   commercial paper               Short-term, unsecured promissory notes issued by corporations;
                                   sometimes referred to as <I>corporate paper</I>. (p. 245)
5   finance company paper          Short-term secured promissory notes issued by sales finance
                                   companies. (p. 245)
5   bankers’ acceptances           Created when a chartered bank adds its guarantee of payment to the
                                   promissory note of a corporate borrower. (p. 246)
5   day loans                      Made by chartered banks to investment dealers who are major
                                   holders of treasury bills. (p. 246)
5   Eurocurrency market            The market for short-term bank deposits denominated in U. S. (p.
                                   246)
5   London Interbank Offered       The base interest rate on all Eurocurrency loans. (p. 247)
    Rate (LIBOR)

5   term loan                      A borrowing arrangement, usually with a bank, for a certain
                                   amount at a stated interest rate for a specific time period. (p. 248 )
5   bond                           A long-term debt security that has a specific asset or assets pledged
                                   as collateral. (p. 249)
5   debenture                      An unsecured long-term debt security that is backed by the general
                                   earnings potential of the corporation. (p. 249)
5   long-term debt                 A contractual liability between the two parties, the borrower
                                   (issuer) and the lender (saver). (p. 249)
5   coupon rate                    The interest rate on a long-term debt issue which is set at the time
                                   of the issue and is constant for the full term of the issue. (p. 250)
5   financial engineering          Designing new financial securities or processes due to changing
                                   market conditions and investor preferences. (p. 250)
5   trust indenture (trust deed)   The legal document that details the contractual relationship
                                   between the borrower and lender. (p. 252)
5   trustee                        A third party who acts on behalf of the purchasers of the debt
                                   securities. (p. 252)
5   restrictive covenants          Contractual clauses that place operating and financial constraints
                                   on the borrower. (p. 252)
5   subordination                  A stipulation that subsequent creditors agree to wait until all claims
                                   of the <I>senior debt</I> are satisfied. (p. 253)
5   sinking-fund requirement       A provision providing for the gradual retirement of long-term debt
                                   prior to the original term of the issue. (p. 253)
5   call price (bond)              The stated price at which bonds may be repurchased prior to
                                   maturity by using the call feature. (p. 254)
5   call premium                   The amount by which the call price exceeds the bond’s par value.
                                   (p. 254)
5   floor rate                     The yield on federal government debt for any maturity. (p. 257)

5   risk premium                   The additional coupon investors will require based on the risk of
                                   the issuer and of the debt issue. (p. 257)
5   Eurobond                       Long-term debt issued by an international borrower in a currency
                                   other than that of the country in which it is sold. (p. 259)
5   foreign bond                   Long-term debt issued in a country’s financial market, in that
                                   country’s currency, by a foreign borrower. (p. 260)
5   limited liability              A feature of common equity meaning that investors cannot lose
                                   more than they have invested in the firm. (p. 261)
5   privately owned (company)      All common shares of a firm are owned by a single individual. (p.
                                   261)
5   closely owned (company)        All common shares of a firm are owned by a small group of
                                   investors (such as a family). (p. 261)
5   publicly owned (company)       Common shares of a firm are owned by a broad group of unrelated
                                   individual or institutional investors. (p. 261)
5   preemptive rights              Allow common shareholders to maintain their proportionate
                                   ownership in the corporation when new shares are issued. (p. 261)
5   dilution of ownership rights   Occurs when a new share issue results in each present shareholder
                                   having a claim on a smaller part of the firm’s earnings than
                                   previously. (p. 261)




5   non-voting common shares       Common shares that carry no right to vote on issues affecting the
                                   company. (p. 265)
5   subordinate voting             Common shares that carry a right to vote on issues affecting the
    common shares                  company but the vote is inferior to the votes of other shares. (p.
                                   265)
5   voting (or superior voting)    Common shares that carry superior voting privileges to other
    shares                         common shares. (p. 265)

5   dual-class share structure     A company that has both non-voting (or subordinate) and voting
                                   (or superior voting) shares outstanding. (p. 265)
5   coattail provision             In the event of a takeover offer for the company, this provision
                                   allows the holders of the non-voting or restricted-voting shares the
                                   right to convert their shares into an equal number of the superior
                                   voting shares. (p. 266)
5   proxy statement                A statement giving the votes of a shareholder to another party. (p.
                                   267)
5   proxy battle                   The attempt by a non-management group to gain control of the
                                   management of a firm by soliciting a sufficient number of proxy
                                   votes. (p. 267)
5   international equity market    A vibrant equity market that emerged in the past 20 years to allow
                                   corporations to sell blocks of shares in several different countries
                                   simultaneously. (p. 267)
5   American Depository            Claims issued by U. S. banks that represent ownership of a
    Receipts (ADRs)                foreign company’s common shares held by the bank in the foreign
                                   market. (p. 269)
5   preferred equity               The third major source of long-term financing for corporations that
                                   broadens the firm’s capital structure, raising financing without
                                   giving up ownership or incurring obligations. (p. 269)
5   stated value                   The value of the preferred share on the issue date. (p. 269)

5   cumulative feature             Missed dividend payments on preferred shares accumulate,
                                   meaning that dividends in arrears must be paid with the current
                                   dividend prior to the payment of dividends to common
                                   shareholders. (p. 270)
5   call price (preferred)         The repurchase price for a preferred share issue; generally the
                                   stated value plus a call premium. (p. 271)
5   retractable preferreds         A type of preferred share whose holder has the right to force the
                                   issuer to repurchase the preferred share at the stated value. (p. 272)
5   floating rate preferreds       A type of preferred share whose quarterly dividend paid is based on
                                   interest rates in the market and will float with these rates. (p. 272)
5   convertible preferreds         A type of preferred share whose holders have the option of
                                   converting them into a predetermined number of common shares
                                   on a specific date. (p. 272)
5   Dutch Auction preferred        Preferred shares similar to money market securities with no stated
    shares                         maturity; the dividend rate is reset on a regular basis through a
                                    Dutch auction process. (p. 272)
5   securities exchanges            The secondary marketplace that allows for the subsequent trading
                                    of financial securities created in the primary market. (p. 273)
5   efficient market                A market that allocates funds to their most productive uses due to
                                    competition among wealth-maximizing investors; it determines and
                                    publicizes prices that are believed to be close to their true value. (p.
                                    273)
5   over-the-counter exchange       An intangible market for the purchase and sale of securities not
                                    listed on organized exchanges. (p. 275)
5   Nasdaq                          The National Association of Securities Dealers Automated
                                    Quotation System, the best-known OTC market in the world, which
                                    rivals the New York Stock Exchange in trading volumes. (p. 275)
5   board lot                       A trade of 100 shares, the usual multiple for most share
                                    transactions. (p. 276)
5   odd lots                        Share transactions that are not for a multiple of 100 shares. (p. 276)

5   price/earnings (P/E) ratio      Measures the amount investors are willing to pay for each dollar of
                                    the firm’s earnings. (p. 277)
5   underwriting                    The means by which new financial securities are created in the
                                    primary market, the basic financial market transaction. (p. 282)
5   investment banker               A term for investment dealers when performing the underwriting
                                    function. (p. 282)
5   private placements              The sale of the security directly to a group of investors or an
                                    institutional investor; these securities will not trade on financial
                                    markets after issue. (p. 282)
5   public offerings                The sale of securities that will be traded on secondary financial
                                    markets. (p. 282)
5   initial public offering (IPO)   Referred to as <I>going public</I>, the process of offering
                                    common shares of a privately owned company to the general public
                                    for the first time. (p. 282)
5   new issue                       An issue of long-term debt, preferred shares, or common shares
                                    where the funds raised flow to the company. (p. 282)
5   seasoned offering               A new issue of common shares; the shares sold add to the existing
                                    pool of common shares. (p. 282)
5   secondary offering              The sale to the public of a large block of common shares held by
                                    the founding owners or a controlling company. (p. 282)
5   preliminary prospectus          The document that provides all information investors require to
                                    make a decision regarding the investment merits of the security
                                    issue. (p. 283)
5   red herring                     Another term for the preliminary prospectus, so called due to the
                                    statement on the first page printed in red ink stating that the
                                    securities have not been approved for sale. (p. 283)
5   due diligence                   The process completed by the underwriter to ensure there is no
                                    misrepresentation and that the prospectus contains full and true
                                    disclosure. (p. 283)
5   underwriting syndicate          The group of investment dealers who buy the security issue from
                                    the company and then resell it to investors (savers). (p. 284)
5   banking group                   Includes the lead underwriter and, in most larger deals, a number of
                                    other large investment dealers. (p. 284)
5   selling group                   Smaller, regional investment dealers who do not assume any of the
                                    risks of underwriting, but only attempt to sell a certain portion of
                                    the issue. (p. 284)
5   firm agreement                  An underwriting agreement where the syndicate agrees to buy all
                                    of the securities at the stated price, guaranteeing the organization
                                    receives the amount of money. (p. 284)
5   best efforts agreement         An underwriting agreement where the syndicate agrees to
                                   <I>try</I> to sell the issue, but the sale is not guaranteed. (p. 284)
5   escape clauses                 Provisions in the underwriting agreement that allow the syndicate
                                   to not buy the issue from the organization if specific conditions
                                   exist. (p. 284)
5   road show                      Presentations, by the company and lead underwriter, regarding the
                                   issue made to financial analysts and institutional investors across
                                   Canada. (p. 285)
5   green sheet                    A document prepared by the underwriter that summarizes key
                                   information in the prospectus. (p. 285)
5   blue skying                    An investment industry term referring to the approval of the final
                                   prospectus by provincial securities commissions. (p. 285)
5   prompt offering prospectus     A filing process for firms meeting certain requirements that allows
    (POP) system                   companies to raise financing within five days of filing. (p. 286 )

5   short-form prospectus          The document filed for the POP system that omits much of the
                                   information that is in a “regular” prospectus. (p. 286)
5   bought deal                    The lead underwriter(s) purchases the total amount of a new
                                   security issue from the issuing company with the intention of
                                   quickly selling the issue to investors. (p. 289)
6   time line                      A horizontal line on which time zero appears at the leftmost end
                                   and future periods are marked from left to right; can be used to
                                   depict investment cash flows. (p. 304)
6   compound interest              Interest earned on a given deposit that has become part of the
                                   principal at the end of a specified period. (p. 308)
6   principal                      The amount of money on which interest is paid. (p. 308)

6   future value                   The value of a present amount at a future date found by applying
                                   <I>compound interest</I> over a specified period of time. (p.
                                   308)
6   future value interest factor   The multiplier used to calculate at a specified interest rate the
                                   future value of a present amount as of a given time. (p. 310)
6   semiannual compounding         Compounding of interest over two periods within the year. (p. 313)
6   quarterly compounding          Compounding of interest over four periods within the year. (p. 313)

6   continuous compounding         Compounding of interest an infinite number of times per year at
                                   intervals of microseconds. (p. 316)
6   nominal (stated) annual rate   Contractual annual rate of interest charged by a lender or promised
                                   by a borrower. (p. 317)
6   effective (true) annual rate   The annual rate of interest actually paid or earned. (p. 317)
    (EAR)
6   annual percentage rate         The <I>nominal annual rate</I> of interest, found by multiplying
    (APR)                          the periodic rate by the number of periods in 1 year. (p. 318)

6   annuity                        A stream of equal annual cash flows. These cash flows can be
                                   <I>inflows</I> of returns earned on investments or
                                   <I>outflows</I> of funds invested to earn future returns. (p. 319)
6   ordinary annuity               An annuity for which the cash flow occurs at the <I>end</I> of
                                   each period. (p. 319)
6   annuity due                    An annuity for which the cash flow occurs at the
                                   <I>beginning</I> of each period. (p. 319)
6   future value interest factor   The multiplier used to calculate the future value of an <I>ordinary
    for an annuity                 annuity</I> at a specified interest rate over a given period of time.
    (<I>FVIFa</I>)                 (p. 321)
6   present value                   The current dollar value of a future amount; the amount of money
                                    that would have to be invested today at a given rate of return over a
                                    specified period to equal the future amount. (p. 326)
6   discounting cash flows          The process of finding present values; the inverse of compounding
                                    interest. (p. 326)
6   present value interest factor   The multiplier used to calculate at a specified discount rate the
                                    present value of an amount to be received in a future period. (p.
                                    327)
6   mixed stream                    A stream of cash flows of different amounts at various future points
                                    in time. (p. 330)
6   perpetuity                      An annuity with an infinite life, providing an identical cash flow
                                    every year. (p. 337)
6   present value interest factor   The multiplier used to calculate the present value of an annuity at a
    for an annuity                  specified discount rate over a given period of time. (p. 333)

6   interest-only loans             Loans that only require the periodic payment of interest and the
                                    separate repayment of principal at some future date or dates. (p.
                                    340)
6   installment loan                A loan where each payment made is an equal amount, and consists
                                    of some interest and some principal; as payments are made, the
                                    amount of interest paid falls, while the amount of principal paid
                                    increases. (p. 340)
6   loan amortization schedule      A table that allocates each loan payment to interest and principal,
                                    so that over the amortization period of the loan, the principal
                                    outstanding is reduced to 0. (p. 340)
7   portfolio                       A collection, or group, of assets. (p. 367)

7   risk                            The chance of financial loss or, more formally, the variability of
                                    returns associated with a given asset. (p. 368)
7   return                          The total gain or loss experienced on an investment asset over a
                                    given period of time; calculated by dividing the asset’s change in
                                    price plus any cash distributions during the period by its price at
                                    the beginning of the period. (p. 369)
7   arithmetic mean                 The sum of the periodic returns divided by the total number of
                                    periods for which returns are available. (p. 370)

7   geometric mean                  The average compound rate of return earned on the investment in
                                    an asset per holding period. (p. 370)
7   risk-indifferent                The attitude toward risk in which no change in return would be
                                    required for an increase in risk. (p. 372)
7   risk-averse                     The attitude toward risk in which an increased return would be
                                    required for an increase in risk. (p. 373)
7   risk-seeking                    The attitude toward risk in which a decreased return would be
                                    accepted for an increase in risk. (p. 373)
7   sensitivity analysis            An approach for assessing risk that uses a number of possible
                                    return estimates to obtain a sense of the variability among
                                    outcomes. (p. 373)
7   range                           A measure of an asset’s risk, which is found by subtracting the
                                    pessimistic (worst) outcome from the optimistic (best) outcome. (p.
                                    374)
7   probability                     The <I>chance</I> that a given outcome will occur. (p. 375)
7   probability distribution        A model that relates probabilities to the associated outcomes. (p.
                                    375)
7   bar chart                       The simplest type of probability distribution; shows only a limited
                                    number of outcomes and associated probabilities for a given event.
                                  (p. 375)
7   continuous probability        A probability distribution showing all the possible outcomes and
    distribution                  associated probabilities for a given event. (p. 375)
7   standard deviation            The most common statistical indicator of an asset’s risk; it
    (s<I>k</I>)                   measures the dispersion around the expected value. (p. 376)
7   expected return ˆ<I>kj</I>    The most likely return on asset <I>j</I> over a stated period. (p.
                                  376)
7   normal probability            A symmetrical probability distribution whose shape resembles a
    distribution                  "'bell-shaped” curve. (p. 377)
7   coefficient of variation      A measure of relative dispersion that is useful in comparing the risk
    (<I>CV</I>)                   of assets with differing expected returns. (p. 381)
7   risk premium                  The extra return required to invest in a risky asset rather than a
                                  risk-free asset (t-bills). (p. 387)
7   efficient portfolio           A portfolio that maximizes return for a given level of risk or
                                  minimizes risk for a given level of return. (p. 392)
7   correlation                   A statistical measure of the relationship, if any, between series of
                                  numbers representing data of any kind. (p. 393)
7   positively correlated         Descriptive of two series that move in the same direction. (p. 393)
7   negatively correlated         Descriptive of two series that move in opposite directions. (p. 393)
7   correlation coefficient       A measure of the degree of correlation between two series. (p. 393)
7   perfectly positively          Describes two positively correlatedseries that have a correlation
    correlated                    coefficientof +1. (p. 393)
7   perfectly negatively          Describes two negatively correlated series that have a correlation
    correlated                    coefficient of 21. (p. 393)
7   uncorrelated                  Two series of data that lack any relationship; this is represented by
                                  a correlation coefficient of 0. (p. 394)
7   political risk                Risk that arises from the possibility that a host government might
                                  take actions harmful to foreign investors or that political turmoil in
                                  a country might endanger investments made in that country by
                                  foreign nationals. (p. 401)
7   capital asset pricing model   The basic theory that links together risk and return for all assets. (p.
    (CAPM)                        402)
7   total risk                    The combination of a security’s nondiversifiable and diversifiable
                                  risk. (p. 402)
7   diversifiable risk            The portion of an asset’s risk that is attributable to firm-specific,
                                  random causes; can be eliminated through diversification. (p. 402)



7   nondiversifiable risk         The relevant portion of an asset’s risk attributable to market factors
                                  that affect all firms; cannot be eliminated through diversification.
                                  (p. 402)
7   beta coefficient (b)          A measure of nondiversifiable risk. An index of the degree of
                                  movement of an asset’s return in response to a change in the
                                  market return. (p. 403)
7   market return                 The return on the market portfolio of all traded securities. (p. 403)
7   security market line (SML)    The depiction of the capital asset pricing model (CAPM) as a graph
                                  that reflects the required return in the marketplace for each level of
                                  nondiversifiable risk (beta). (p. 408)
7   efficient market              An assumed “perfect” market in which there are many small
                                  investors, each having the same information and expectations with
                                  respect to securities; there are no restrictions on investment, no
                                  taxes, and no transaction costs; and all investors are rational, view
                                  securities similarly, and are risk-averse, preferring higher returns
                                  and lower risk. (p. 413)
8   interest rate                 The compensation paid by the borrower of funds to the lender;
                                  from the borrower’s point of view, the cost of borrowing funds. (p.
                                  436)
8   required return               The cost of funds obtained by selling equity; it is based on the
                                  return investors require given the risk of the investment. (p. 436)
8   real rate of interest         The rate that creates an equilibrium between the supply of savings
                                  and the demand for investment funds in a perfect world, without
                                  inflation, where funds suppliers and demanders have no liquidity
                                  preference and all outcomes are certain. (p. 437)
8   nominal rate of interest      The actual rate of interest charged by the supplier of funds and paid
                                  by the demander. (p. 437)
8   risk-free rate of interest,   The required return on a risk-free asset, typically a 3-month
    <I>R</I><sub>F</sub>          government of Canada t-bill. (p. 438)

8   term structure of interest    The relationship between the yield (rate of return) and the time to
    rates (TSIR)                  maturity for debt securities with similar default risk. (p. 440)
8   yield to maturity             Annual rate of interest earned on a security purchased on a given
                                  day and held to maturity. (p. 440)
8   yield curve                   A graph of the <I>term structure of interest rates</I> that depicts
                                  the relationship between the <I>yield to maturity</I> of a security
                                  (<I>y</I> axis) and the time to maturity (<I>x</I> axis); it
                                  shows the pattern of interest rates on securities of equal quality and
                                  different maturity. (p. 440)
8   normal (upward-sloping)       An upward-sloping yield curve that indicates generally cheaper
    yield curve                   short-term borrowing costs than long-term borrowing costs. (p.
                                  440)
8   inverted (downward-           A downward-sloping yield curve that indicates generally cheaper
    sloping) yield curve          long-term borrowing costs than short-term borrowing costs. (p.
                                  440)
8   flat yield curve              A yield curve that reflects relatively similar borrowing costs for
                                  both short- and longer-term loans. (p. 440)
8   expectations hypothesis       Theory suggesting that the yield curve reflects investor
                                  expectations about future interest rates; an increasing inflation
                                  expectation results in an upward-sloping yield curve and a
                                  decreasing inflation expectation results in a downward-sloping
                                  yield curve. (p. 442)
8   liquidity preference theory   Theory suggesting that for any given issuer, long-term yields tend
                                  to be higher than short-term yields due to the lower liquidity and
                                  higher responsiveness to general interest rate movements of longer-
                                  term securities; causes the yield curve to be upward-sloping. (p.
                                  443)
8   market segmentation theory    Theory suggesting that the market for loans is segmented on the
                                  basis of maturity and that the supply of and demand for loans
                                  within each segment determine prevailing yields; the slope of the
                                  yield curve is determined by the general relationship between the
                                  prevailing rates in each segment. (p. 443)
8   floor rate                    The yield on the debt securities, of any maturity, for the least risky
                                  issuer in the country&#151the government of Canada. (p. 444)
8   risk&#151return tradeoff      The expectation that for accepting greater risk, investors must be
                                  compensated with greater returns. (p. 446)
8   valuation                     The process that links risk and return to determine the value of an
                                  asset. (p. 447)

8   interest-rate risk            The chance that interest rates will change and thereby change the
                                  required return and bond value. (p. 457)
8   yield to maturity (YTM)       The rate of return investors earn if they buy a bond at a specific
                                  price and hold it until maturity. Assumes that issuer makes all
                                  scheduled interest and principal payments as promised. (p. 459)
8   expected return,              The yearly return an investor expects to receive based on an
    ˆ<I>ki</I>                    analysis of the fundamentals of the asset and its ability to generate
                                  cash flows in the future. The expected return on a common share.
                                  (p. 463)
8   efficient market hypothesis   Theory describing the behaviour of an assumed “perfect” market,
    (EMH)                         which states (1) securities are typically in equilibrium, (2) security
                                  prices fully reflect all public information available and react swiftly
                                  to new information, and (3) because stocks are fairly priced,
                                  investors need not waste time looking for mispriced securities. (p.
                                  464)
8   dividend valuation model      The value of common shares is dependent on the present value of
    (DVM)                         the dividends received over an infinite time horizon. (p. 465)
8   zero-growth model             An approach to dividend valuation that assumes a constant,
                                  nongrowing dividend stream. (p. 466)
8   constant-growth model         A widely cited dividend valuation approach that assumes that
                                  dividends will grow at a constant rate that is less than the required
                                  return. (p. 466)
8   Gordon model                  A common name for the <I>constant-growth model</I> that is
                                  widely cited in dividend valuation. (p. 467)
8   variable-growth model         A dividend valuation approach that allows for a change in the
                                  dividend growth rate. (p. 468)
8   book value per share          The amount per common share that would be received if all of the
                                  firm’s assets were <I>sold for their exact book (accounting)
                                  value</I> and the proceeds remaining after paying all liabilities
                                  (and preferred shares) were divided among the common
                                  shareholders. (p. 472)
8   liquidation value per share   The <I>actual amount</I> per common share that would be
                                  received if all of the firm’s assets were <I>sold for their market
                                  value</I>, liabilities (and preferred shares) were paid, and any
                                  remaining money were divided among the common shareholders.
                                  (p. 473)
8   price/earnings multiple       A technique to estimate the firm’s share value; calculated by
    approach                      multiplying the firm’s expected earnings per share (EPS) by an
                                  appropriate P/E ratio. (p. 473)
8   interest equivalent factor    A tax-related adjustment that must be made that allows the before-
                                  tax dividend yield on equity securities to be compared to the
                                  before-tax yield on debt securities. (p. 479)
9   cost of capital               The rate of return that a firm must earn on its investment projects to
                                  increase the market value of its common shares. (p. 502)
9   business risk                 The risk to the firm of being unable to cover operating costs. (p.
                                  502)
9   financial risk                The risk to the firm of being unable to cover required financial
                                  obligations (interest, lease payments, preferred share dividends and
                                  principal repayments). (p. 502)
9   marginal cost of financing    The cost of financing today, based on company-specific and
                                  financial market data; it is based on an estimate of investors’
                                  current required returns. (p. 504)
9   optimal capital structure     The mix of debt and equity financing that results in the lowest
    (OCS)                         possible cost of capital for a company. (p. 504)
9   cost of long-term debt,       The after-tax cost today of raising long-term funds through
    <I>k</I><sub>dt</sub>         borrowing from either financial institutions or investors. (p. 509)
9    net proceeds                  Funds actually received from the sale of a security. (p. 510 )
9    flotation costs               The total costs of issuing and selling a security. (p. 510)
9    discounts                     Reductions in the price of the security that are required to sell this
                                   security to investors. (p. 510)
9    cost of preferred equity,     The relationship between the cost of the preferred equity and the
     <I>k<sub>p</sub></I>          amount of funds provided by the preferred share issue; found by
                                   dividing the annual dividend, <I>D<sub>t</sub></I>, by the net
                                   proceeds from the sale of the preferred share, <I>N<sub>p</sub></I>.
                                   (p. 514)
9    cost of common equity,        The expected return investors require to hold the common shares of
     <I>k<sub>s</sub></I>          a company. (p. 515)
9    constant-growth dividend      Assumes that the value of a common share equals the present value
     valuation (Gordon) model      of all future dividends (assumed to grow at a constant rate) that it is
                                   expected to provide over an infinite time horizon. (p. 515)
9    capital asset pricing model   Calculates investors’ required return on common equity based on
     (CAPM)                        the risk-free rate of return plus the asset risk premium. (p. 516)

9    cost of reinvested profits,   Since reinvested profits are common shareholders’ money, these
     <I>k<sub>r</sub></I>          funds have a cost which is the cost of common equity,
                                   <I>k<sub>s</sub></I>. (p. 518)
9    cost of a new issue of        The cost of common shares, net of discounts and associated
     common shares,                flotation costs. (p. 518)
     <I>k<sub>n</sub></I>

9    discounted                    Sold at a price below current market price,
                                   <I>P</I><sub>0</sub>. (p. 518)
9    weighted average cost of      Reflects the expected cost of funds for the upcoming year; found
     capital (WACC),               by weighting the cost of each specific type of capital by its
     <I>k<sub>a</sub></I>          proportion in the firm’s capital structure. (p. 521)
9    book value weights            Weights that use accounting values to measure the proportion of
                                   each type of capital in the firm’s financial structure. (p. 523)
9    market value weights          Weights that use market values to measure the proportion of each
                                   type of capital in the firm’s financial structure. (p. 523)
9    historic weights              Either book or market value weights based on <I>actual</I>
                                   capital structure proportions. (p. 523)
9    target weights                Either book or market value weights based on <I>optimal</I>
                                   capital structure proportions. (p. 524)
9    marginal cost of capital      The firm’s average cost of capital associated with its <I>next
     (MCC)                         dollar</I> of total new financing. (p. 525)
9    break point                   The level of new financing at which the cost of one of the financing
                                   components rises, there by causing an upward shift in the
                                   <I>marginal cost of capital (MCC)</I>. (p. 525)
9    marginal cost of capital      Graph that relates the firm’s weighted average cost of capital to the
     (MCC) schedule                level of total new financing. (p. 527)
9    investment opportunities      A ranking of investment possibilities from best (highest return) to
     schedule (IOS)                worst (lowest return). (p. 528)
10   breakeven analysis            Indicates the level of operations necessary to cover all operating
                                   costs and the profitability associated with various levels of sales.
                                   (p. 552)
10   operating breakeven point     The level of sales necessary to cover all operating costs; the point
                                   at which EBIT = $0. (p. 553)
10   operating leverage            The use of <I>fixed operating costs</I> to magnify the effects of
                                   changes in sales on the firm’s earnings before interest and taxes. (p.
                                   558)
10   degree of operating           The numerical measure of the firm’s operating leverage. (p. 559)
     leverage (DOL)
10   financial leverage             The use of <I>fixed financial costs</I> to magnify the effects of
                                    changes in earnings before interest and taxes on the firm’s earnings
                                    per share. (p. 562)
10   degree of financial leverage   The numerical measure of the firm’s financial leverage. (p. 564)
     (DFL)
10   total leverage                 The use of <I>fixed costs, both operating and financial</I>, to
                                    magnify the effect of changes in sales on the firm’s earnings per
                                    share. (p. 565)
10   degree of total leverage       The numerical measure of the firm’s total leverage. (p. 566)
     (DTL)
10   pecking order                  A hierarchy of financing beginning with reinvested profits
                                    followed by debt financing and finally external equity financing.
                                    (p. 580)
10   asymmetric information         The situation in which managers of a firm have more information
                                    about operations and future prospects than do investors. (p. 581)
10   signal                         A financing action by management that is believed to reflect its
                                    view of the firm’s common share value; generally, debt financing is
                                    viewed as a <I>positive signal</I> that management believes that
                                    the shares are “undervalued,” and a new share issue is viewed as a
                                    <I>negative signal</I> that management believes that the shares
                                    are “overvalued." (p. 581)
10   optimal capital structure      The capital structure at which the weighted average cost of capital
                                    is minimized, thereby maximizing the firm’s value. (p. 583)
10   EBIT&#151EPS approach          An approach for selecting the capital structure that maximizes
                                    earnings per share over the expected range of earnings before
                                    interest and taxes. (p. 584 )
10   financial breakeven point      The level of EBIT necessary just to cover all fixed financial costs;
                                    the level of EBIT for which EPS = $0. (p. 586)
11   reinvested profits             Earnings not distributed as dividends; a form of <I>internal</I>
                                    financing. (p. 612)
11   dividend yield                 The percentage return an investor holding the common share today
                                    would receive based on the most recent quarterly dividend; the
                                    indicated yearly dividend divided by the share price. (p. 614)
11   date of record (dividends)     Set by the firm’s directors, the date on which all persons whose
                                    names are recorded as shareholders receive a declared dividend at a
                                    specified future time. (p. 615)
11   ex dividend                    Period beginning two <I>business days</I> prior to the date of
                                    record during which a stock is sold without the right to receive the
                                    current dividend. (p. 615)
11   payment date                   The actual date on which the firm makes the dividend payment to
                                    the holders of record. (p. 615)
11   dividend reinvestment          Plans that enable shareholders to use dividends received on the
     plans (DRIPs)                  firm’s shares to acquire additional full or fractional shares at no
                                    transaction (brokerage) cost. (p. 616)
11   residual theory of             A theory that the dividend paid by a firm should be the amount left
     dividends                      over after all acceptable investment opportunities have been
                                    undertaken. (p. 617)
11   dividend irrelevance theory    A theory put forth by Miller and Modigliani that, in a perfect
                                    world, the value of a firm is unaffected by the distribution of
                                    dividends and is determined solely by the earning power and risk of
                                    its assets. (p. 620)
11   informational content          The information provided by the dividends of a firm with respect to
                                    future earnings, which causes owners to bid the price of the firm’s
                                    shares up or down. (p. 620)
11   clientele effect               The argument that a firm attracts shareholders whose preferences
                                    with respect to the payment and stability of dividends correspond
                                    to the payment pattern and stability of the firm itself. (p. 620)
11   dividend relevance theory      The theory that there is a direct relationship between a firm’s
                                    dividend policy and its market value. (p. 621)
11   bird-in-the-hand argument      The belief, in support of <I>dividend relevance theory</I>, that
                                    current dividend payments (“a bird in the hand”) reduce investor
                                    uncertainty and result in a higher value for the firm’s shares. (p.
                                    621)
11   dividend policy                The plan to be followed when making the dividend decision. (p.
                                    622)
11   capital impairment rule        Prevents the payment of dividends from the value of common
                                    shares on the balance sheet. (p. 622)
11   insolvency rule                A company cannot pay dividends while insolvent or if the payment
                                    of dividends makes the company insolvent. (p. 622)
11   dividend payout ratio          Indicates the percentage of each dollar earned that is distributed to
                                    the owners in the form of cash; calculated by dividing the firm’s
                                    cash dividend per share by its earnings per share. (p. 625)
11   constant-payout-ratio          A dividend policy based on the payment of a certain percentage of
     dividend policy                earnings to owners in each dividend period. (p. 626)
11   regular dividend policy        A dividend policy based on the payment of a fixed-dollar dividend
                                    in each period. (p. 626)
11   target dividend-payout ratio   A policy under which the firm attempts to pay out a certain
                                    percentage of earnings as a stated dollar dividend, which it adjusts
                                    toward a target payout as proven earnings increases occur. (p. 627)
11   low-regular-and-extra          A dividend policy based on paying a low regular dividend,
     dividend policy                supplemented by an additional dividend when earnings are higher
                                    than normal. (p. 628)
11   extra dividend                 An additional dividend optionally paid by the firm if earnings are
                                    higher than normal in a given period. (p. 628)
11   stock dividend                 The payment to existing owners of a dividend in the form of
                                    common shares. (p. 628)
11   stock split                    A method commonly used to lower the market price of a firm’s
                                    common shares by increasing the number of shares belonging to
                                    each shareholder. (p. 630)
11   share consolidation            A method used to raise the market price of a firm’s stock by
     (reverse stock split)          exchanging a certain number of outstanding shares for one new
                                    share of stock. (p. 631)
11   share repurchase               Company purchase of its own common shares from investors in the
                                    stock market; the company then retires the shares. (p. 631)
11   open-market share              Company purchases of its own shares on a stock exchange at the
     repurchases                    market price once approval from the stock exchange is received;
                                    termed a <I>normal course issuer bid</I> in Canada. (p. 633)
11   fixed-price tender bid         An offer by a company to purchase a certain percentage of its own
                                    shares at a stated price that is well above the current market price
                                    within a specified time period; termed a <I>substantial issuer
                                    bid</I>. (p. 633)
11   Dutch-auction bid              A variation of the fixed-price tender bid where the company
                                    specifies the number of shares it wishes to repurchase and a range
                                    of prices at which it will purchase the shares. (p. 633)
12   capital budgeting              The process of evaluating and selecting long-term investment
                                    projects that achieve the goal of owner wealth maximization. (p.
                                    649)
12   capital expenditure            An outlay of funds by the firm that is expected to produce benefits
                                    over a period of time <I>greater than</I> one year. (p. 650)
12   operating expenditure         An outlay of funds by the firm resulting in benefits received within
                                   one year. (p. 650)
12   capital budgeting process     Consists of five distinct but interrelated steps beginning with
                                   proposal generation, followed by review and analysis, decision
                                   making, implementation, and follow-up. (p. 651)
12   independent projects          Projects whose cash flows are unrelated or independent of one
                                   another; the acceptance of one does not eliminate the others from
                                   further consideration. (p. 652)
12   mutually exclusive projects   Projects that compete with one another, so that the acceptance of
                                   one eliminates the others from further consideration. (p. 653)
12   replacement projects          Projects that involve replacing an existing asset with a new asset.
                                   (p. 653)
12   unlimited funds               The financial situation in which a firm is able to accept all
                                   independent projects that provide an acceptable return. (p. 653)
12   capital rationing             The financial situation in which a firm has only a fixed number of
                                   dollars to allocate among competing capital expenditures. (p. 653)
12   accept/reject approach        The evaluation of capital expenditure proposals to determine
                                   whether they meet the firm’s minimum acceptance criterion. (p.
                                   653)
12   ranking approach              The ranking of capital expenditure projects on the basis of some
                                   predetermined measure, such as the rate of return. (p. 654)
12   cash flow pattern             An initial outflow followed by a series of inflows. (p. 654)
12   incremental cash flows        The additional cash flows&#151outflows or
                                   inflows&#151expected to result from a proposed capital
                                   expenditure. (p. 655)
12   incremental cost              The relevant cash outflow required now, at time zero, for a capital
                                   budgeting project. (p. 655)
12   operating cash inflows        The incremental after-tax cash inflows resulting from use of a
                                   project during its life. (p. 655)
12   terminal cash flow            The after-tax non-operating cash flow occurring in the final year of
                                   a project, usually attributable to liquidation of the project. (p. 656)
12   sophisticated approaches to   Capital budgeting techniques that integrate time value procedures,
     capital budgeting             risk and return considerations, and valuation concepts to select
                                   capital expenditures that are consistent with the firm’s goal of
                                   maximizing owners’ wealth. (p. 656)
12   net present value (NPV)       The difference between the value of the project to the company and
                                   the project’s incremental cost. (p. 657)
12   sunk costs                    Cash outlays that have already been made (i.e., past outlays) and
                                   therefore have no effect on the cash flows relevant to a current
                                   decision. (p. 661 )
12   opportunity costs             Cash flows that could be realized from an alternative use of an
                                   owned asset. (p. 661)
12   incremental cost              The relevant cash outflows incurred if a capital budgeting project is
                                   implemented. (p. 662)
12   installation cost             Costs incurred to place equipment or machinery into operation. (p.
                                   662)
12   incremental cost of a new     The total of all costs incurred to get an asset to the point of being
     asset                         able to produce cash inflows for the company, less the proceeds
                                   from the sale of the asset being replaced. (p. 662)
12   change in net working         The difference between the change in current assets and current
     capital                       liabilities associated with an investment project. (p. 663)
12   operating income              The principal reason a company considers investing in a fixed
                                   asset; operating income may increase because sales increase, costs
                                   decrease, or both occur. (p. 665)
12   capital cost allowance        The tax version of amortization, a non-cash expense that increases
     (CCA)                           cash flow. (p. 667)
12   CCA rates                       Rates set by the Canada Revenue Agency (CRA) that are used to
                                     calculate the CCA on an asset class; the rates range from 4 to 100
                                     percent. (p. 667)
12   undepreciated capital cost      The undepreciated value of an asset or asset class that is the basis
     (UCC)                           for the amount of CCA that is claimed; also referred to as the tax
                                     value of an asset. (p. 667)
12   tax shields                     The tax savings the firm will experience from being able to claim
                                     the CCA on the asset. (p. 668)
12   investment tax credit (ITC)     An incentive for businesses in various regions of the country to
                                     purchase certain types of fixed assets or undertake certain types of
                                     research and development activities; results in a reduction in
                                     federal taxes payable. (p. 669)
12   cash grants                     Direct cash payments by any level of government to the company.
                                     (p. 672)
12   interest rate buydowns          Government payments of interest on a loan on behalf of a
                                     company. (p. 672)
12   wage and rent subsidies         Payment made by the government to the company’s employees or
                                     landlord to reduce the effective cost of proceeding with a project.
                                     (p. 672)
12   tax breaks                      Reductions in the property taxes or reductions in income taxes the
                                     company would have to pay on the profits generated on an
                                     operation. (p. 672)
12   salvage value                   The amount received when a project is terminated and an asset is
                                     sold. (p. 673)
12   net working capital             With the termination of a project, the sales associated with the
     recovered                       project cease, and the company will recover the originally invested
                                     net working capital. (p. 673)
12   payback period                  The length of time in years it takes for a project’s yearly
                                     incremental after-tax cash inflows to recover the incremental cost
                                     of the project. (p. 683)
12   fish-and-bait test              A description for the payback period; it concentrates on recovering
                                     the bait (the incremental cost), paying no attention to the size of the
                                     fish (the present value of all cash inflows). (p. 685)
12   internal rate of return (IRR)   The discount rate that equates the present value of the cash inflows
                                     with the incremental cost of a capital budgeting project; the
                                     discount rate that makes the NPV of a project equal to 0. (p. 686)
12   NPV profile                     A table and/or graph that shows the NPV for a project at various
                                     discount rates. (p. 687)
12   conflicting rankings            Conflicts in the ranking of projects using the NPV and IRR
                                     techniques resulting from differences in the magnitude and timing
                                     of cash inflows. (p. 690)
12   cross-over rate                 The discount rate where NPV profiles intersect, meaning the NPVs
                                     of the two projects are equal, and where the ranking decision for
                                     the projects changes. (p. 691)
13   risk                            The chance that the inputs into the analysis of an investment
                                     project will prove to be wrong. (p. 728)
13   GIGO (garbage in, garbage       If cash inflows are overestimated and/or the cost of capital
     out)                            underestimated, then decisions that prove to be very costly for the
                                     firm and the shareholders can result; poor forecasts can result in
                                     poor capital budgeting decisions. (p. 728)
13   forecasting risk                The possibility that the estimated cash flows are wrong (either too
                                     high or low) and, as a result, a wrong decision is made. (p. 731)
13   breakeven cash inflow           The minimum level of after-tax cash inflow necessary for a project
                                     to be acceptable; that is, NPV is greater than or equal to $0. (p.
                                   732)
13   sensitivity analysis          A behavioural approach that uses a number of possible values for a
                                   given variable to assess its impact on a firm’s return. (p. 732)
13   scenario analysis             A behavioural approach that evaluates the impact on return of
                                   simultaneous changes in a number of variables. (p. 733)
13   simulation                    A statistically based behavioural approach that applies
                                   predetermined probability distributions and random numbers to
                                   estimate risky outcomes. (p. 734)
13   exchange rate risk            The danger that an unexpected change in the exchange rate
                                   between the dollar and the currency in which a project’s cash flows
                                   are denominated can reduce the market value of that project’s cash
                                   flow. (p. 735)
13   transfer prices               Prices that subsidiaries charge each other for the goods and
                                   services traded between them. (p. 736)
13   certainty equivalents (CEs)   Risk-adjustment factors that represent the percent of estimated cash
                                   inflow that investors would be satisfied to receive <I>for
                                   certain</I> rather than the cash inflows that are possible for each
                                   year. (p. 737)
13   risk-free rate,               The rate of return that one would earn on a virtually riskless
     <I>R<sub>F</sub></I>          investment such as a short-term Government of Canada treasury
                                   bill. (p. 737)
13   risk-adjusted discount rate   The rate of return that must be earned on a given project to
     (RADR)                        compensate for the risk of the project. (p. 738)
13   annualized net present        An approach to evaluating unequal-lived projects that converts the
     value (ANPV) approach         net present value of unequal-lived, mutually exclusive projects into
                                   an equivalent annual amount (in NPV terms). (p. 751)
13   real options                  Opportunities that are embedded in capital projects that enable
                                   managers to alter their cash flows and risk in a way that affects
                                   project acceptability (NPV). Also called <I>strategic options</I>.
                                   (p. 752)
13   internal rate of return       An approach to capital rationing that involves graphing project
     approach                      IRRs in descending order against the total dollar investment, to
                                   determine the group of acceptable projects. (p. 755)
13   investment opportunities      The graph that plots project IRRs in descending order against total
     schedule (IOS)                dollar investment. (p. 755)
13   profitability index           The project’s NPV divided by its incremental cost; used to
                                   determine the group of projects with the highest overall present
                                   value. (p. 755)
14   short-term financial          Management of current assets and current liabilities. (p. 775)
     management or working
     capital management
14   net working capital           The difference between the firm’s current assets and its current
                                   liabilities; can be positive or negative. (p. 776)
14   profitability                 The relationship between revenues and costs generated by using the
                                   firm’s assets&#151both current and fixed&#151in productive
                                   activities. (p. 776)
14   risk (of technical            The probability that a firm will be unable to pay its bills as they
     insolvency)                   come due. (p. 776)
14   technically insolvent         Describes a firm that is unable to pay its bills as they come due. (p.
                                   776)
14   operating cycle (OC)          The time from the beginning of the production process to the
                                   collection of cash from the sale of the finished product. (p. 779)
14   cash conversion cycle         The amount of time a firm’s resources are tied up; calculated by
     (CCC)                         subtracting the average payment period from the operating cycle.
                                   (p. 779)
14   permanent financing         Financing required to fund a permanent amount of current assets on
                                 the balance sheet. (p. 780)
14   seasonal financing          Financing required for the seasonal amount of current assets on the
                                 balance sheet. (p. 782)
14   refinancing risk            The risk that the firm may not be able to obtain all of the financing
                                 needed once short-term debt matures. (p. 783)
14   aggressive financing        Use only current liabilities to finance the investment in the current
     strategy                    assets; it reduces costs, but increases the three forms of risk. (p.
                                 783)
14   conservative financing      Use of long-term financing (long-term debt or equity) to finance
     strategy                    the investment in current assets. (p. 783)
14   matching strategy           Use short-term debt to finance the seasonal current assets and long-
                                 term sources to finance the permanent current assets. (p. 783)
14   ABC inventory system        Inventory management technique that divides inventory into three
                                 groups&#151A, B, and C&#151in descending order of importance
                                 and level of monitoring, on the basis of the dollar investment in
                                 each. (p. 787)
14   two-bin method              Unsophisticated inventory-monitoring technique that is typically
                                 applied to C group items and involves reordering inventory when
                                 one of two bins is empty. (p. 787)
14   economic order quantity     Inventory management technique for determining an item’s optimal
     (EOQ) model                 order size, which is the size that minimizes the total of its order
                                 costs and carrying costs. (p. 788)

14   order costs                 The fixed costs of placing, receiving, and handling an inventory
                                 order. (p. 788)


14   carrying costs              The variable costs per unit of holding an item in inventory for a
                                 specific period of time. (p. 788)


14   total cost of inventory     The sum of order costs and carrying costs of inventory. (p. 788)



14   reorder point               The point at which to reorder inventory, expressed as days of lead
                                 time times daily usage. (p. 789)


14   safety stock                Extra inventory that is held to prevent stockouts of important items.
                                 (p. 789)


14   just-in-time (JIT) system   Inventory management technique that minimizes inventory
                                 investment by having materials arrive at exactly the time they are
                                 needed for production. (p. 790)

14   materials requirement       Inventory management technique that applies EOQ concepts and a
     planning (MRP) system       computer to compare production needs to available inventory
                                 balances and determine when orders should be placed for various
                                 items on a product’s bill of materials. (p. 790)
14   credit standards             The firm’s minimum requirements for extending credit to a
                                  customer. (p. 791)


14   four C’s of credit           The four key dimensions—character, capacity, capital, and
                                  conditions&#151used by credit analysts to provide a framework for
                                  in-depth credit analysis. (p. 791)

14   credit scoring               A credit selection method commonly used with high-volume/small-
                                  dollar credit requests; relies on a credit score determined by
                                  applying statistically derived weights to a credit applicant’s scores
                                  on key financial and credit characteristics. (p. 794)
14   credit terms                 The terms of sale for customers who have been extended credit by
                                  the firm. (p. 795)
14   cash discount                A percentage deduction from the purchase price; available to credit
                                  customers that pay their accounts within a specified time. (p. 795)
14   cash discount period         The number of days after the beginning of the credit period during
                                  which the cash discount is available. (p. 796)
14   credit period                The number of days after the beginning of the credit period until
                                  full payment of the account is due. (p. 796)
14   credit monitoring            The ongoing review of a firm’s accounts receivable to determine
                                  whether customers are paying according to the stated credit terms.
                                  (p. 799)
14   aging of accounts            A credit-monitoring technique that uses a schedule indicating the
     receivable                   percentages of the total accounts receivable balance that have been
                                  outstanding for specified periods of time. (p. 801)
14   float                        Funds that have been sent by the payer but are not yet usable funds
                                  to the payee. (p. 803)
14   mail float                   The time delay between when payment is placed in the mail and
                                  when it is received. (p. 804)
14   processing float             The time between receipt of a payment and its deposit into the
                                  firm’s account. (p. 804)
14   clearing float               The time between deposit of a payment and when spendable funds
                                  become available to the firm. (p. 804)
14   lockbox system               A collection procedure in which customers mail payments to a post
                                  office box that is emptied regularly by the firm’s bank, which
                                  processes the payments and deposits them in the firm’s account.
                                  This system speeds up collection time by reducing processing time
                                  as well as mail and clearing time. (p. 804)
14   controlled disbursing        The strategic use of mailing points and bank accounts to lengthen
                                  mail float and clearing float, respectively. (p. 804)
14   cash concentration           The process used by the firm to bring lockbox and other deposits
                                  together into one bank, often called the <I>concentration
                                  bank</I>. (p. 805)
14   depository transfer cheque   An unsigned cheque drawn on one of a firm’s bank accounts and
     (DTC)                        deposited in another. (p. 805)
14   ACH (automated               Preauthorized electronic withdrawal from the payer’s account and
     clearinghouse) transfer      deposit into the payee’s account via a settlement among banks by
                                  the automated clearinghouse, or ACH. (p. 805)
14   wire transfer                An electronic communication that, via bookkeeping entries,
                                  removes funds from the payer’s bank and deposits them in the
                                  payee’s bank. (p. 805)
14   zero-balance account         A disbursement account that always has an end-of-day balance of
     (ZBA)                        zero because the firm deposits money to cover cheques drawn on
                                  the account only as they are presented for payment each day. (p.
                                    806)
15   spontaneous liabilities        Financing that arises from the normal course of business; the two
                                    major short-term sources of such liabilities are accounts payable
                                    and accruals. (p. 820)
15   unsecured short-term           Short-term financing obtained without pledging specific assets as
     financing                      collateral. (p. 821)

15   accounts payable               Management by the firm of the time that elapses between its
     management                     purchase of raw materials and its mailing payment to the supplier.
                                    (p. 822)
15   cost of giving up a cash       The rate of interest implied by delaying payment of an account
     discount                       payable for an additional number of days. (p. 823)
15   stretching accounts payable    Paying bills as late as possible without damaging the firm’s credit
                                    rating. (p. 826)
15   accruals                       Liabilities for services received for which payment has yet to be
                                    made and for which an invoice has not been received. (p. 826)
15   short-term, self-liquidating   An unsecured short-term loan in which the use to which the
     loan                           borrowed money is put provides the mechanism through which the
                                    loan is repaid. (p. 827)
15   prime rate of interest         The lowest rate of interest charged by leading banks on business
     (prime rate)                   loans to their most secure business borrowers. (p. 827)
15   fixed rate loan                A loan with a rate of interest that is determined at a set increment
                                    above the prime rate at which it remains fixed until maturity. (p.
                                    828)
15   floating rate loan             A loan with a rate of interest initially set at a stated premium above
                                    the prime rate and allowed to “float,” or vary, as the prime rate
                                    varies until maturity. (p. 828)
15   discount loans                 Loans on which interest is paid in advance by being deducted from
                                    the amount borrowed. (p. 828)
15   single-payment note            A short-term, one-time loan made to a borrower who needs funds
                                    for a specific purpose for a short period. (p. 829)
15   line of credit                 An agreement between a commercial bank and a business
                                    specifying the amount of unsecured short-term borrowing the bank
                                    will make available to the firm over a given period of time. (p. 830)
15   operating-change               Contractual restrictions that a bank may impose on a firm’s
     restrictions                   financial condition or operations as part of a line-of-credit
                                    agreement. (p. 830)
15   compensating balance           A required chequing account balance equal to a certain percentage
                                    of the amount borrowed from a bank under a line-of-credit or
                                    revolving credit agreement. (p. 831)
15   annual cleanup                 The requirement that for a certain number of days during the year
                                    borrowers under a line of credit carry a zero loan balance (i.e., owe
                                    the bank nothing). (p. 831)
15   revolving credit agreement     A line of credit guaranteed to a borrower by a commercial bank
                                    regardless of the scarcity of money. (p. 832)
15   commitment fee                 The fee that is normally charged on a <I>revolving credit
                                    agreement</I>; it often applies to the average unused balance of
                                    the borrower’s credit line. (p. 832)
15   corporate paper                A form of financing consisting of short-term, unsecured promissory
                                    notes issued by firms with a high credit standing. (p. 832)
15   letter of credit               A letter written by a company’s bank to the company’s foreign
                                    supplier, stating that the bank guarantees payment of an invoiced
                                    amount if all the underlying agreements are met. (p. 834)
15   secured short-term             Short-term financing (loans) that has specific assets pledged as
     financing                      collateral. (p. 836)
15   security agreement             The agreement between the borrower and the lender that specifies
                                    the collateral held against a secured loan. (p. 836)
15   percentage advance             The percentage of the book value of the collateral that constitutes
                                    the principal of a secured loan. (p. 837)
15   pledge of accounts             The use of a firm’s accounts receivable as security, or collateral, to
     receivable                     obtain a short-term loan. (p. 838)
15   lien                           A publicly disclosed legal claim on collateral. (p. 838)
15   non-notification basis         The basis on which a borrower, having pledged an account
                                    receivable, continues to collect the account payments without
                                    notifying the account customer. (p. 838)
15   notification basis             The basis on which an account customer whose account has been
                                    pledged (or factored) is notified to remit payment directly to the
                                    lender (or factor). (p. 838)




15   factoring accounts             The outright sale of accounts receivable at a discount to a factor or
     receivable                     other financial institution. (p. 838)
15   factor                         A financial institution that specializes in purchasing accounts
                                    receivable from businesses. (p. 838)
15   non-recourse basis             The basis on which accounts receivable are sold to a factor with the
                                    understanding that the factor accepts all credit risks on the
                                    purchased accounts. (p. 839)
15   floating inventory lien        A secured short-term loan against inventory under which the
                                    lender’s claim is on the borrower’s inventory in general. (p. 841)
15   trust receipt inventory loan   A secured short-term loan against inventory under which the lender
                                    advances 80 to 100 percent of the cost of the borrower’s relatively
                                    expensive inventory items in exchange for the borrower’s promise
                                    to repay the lender, with accrued interest, immediately after the
                                    sale of each item of collateral. (p. 841)
15   warehouse receipt loan         A secured short-term loan against inventory under which the lender
                                    receives control of the pledged inventory collateral, which is stored
                                    by a designated warehousing company on the lender’s behalf. (p.
                                    841)
16   leasing                        The process by which a firm can obtain the use of fixed assets for
                                    which it must make a series of contractual, periodic, tax-deductible
                                    payments. (p. 854)
16   lessee                         Has physical control of and uses the assets under a lease contract;
                                    makes the lease payments. (p. 854)
16   lessor                         The owner of an asset being leased; receives the lease payments.
                                    (p. 854)
16   conditional sales agreement    A way to finance the purchase of an asset with the debt financing
                                    provided to the purchaser by the asset vendor. (p. 856)
16   operating lease                A cancellable contractual arrangement in which the lessor allows
                                    the lessee use of an asset in return for stated periodic payments;
                                    generally, the term of the lease is less than the life of the asset, and
                                    the total payments over the term of the lease are less than the
                                    lessor’s initial cost of the leased asset. (p. 856)
16   cancellable                    An option on an operating lease that allows the lessee to stop
                                    making lease payments and return the asset to the lessor. (p. 857)
16   financial (or capital) lease   A non-cancellable contractual arrangement for major fixed assets
                                    requiring the lessee to make periodic payments to the lessor;
                                    generally, the term of the lease is the life of the asset, and the total
                                    payments over the term of the lease are greater than the lessor’s
                                    initial cost of the leased asset. (p. 857)
16   direct lease                   A lease under which a lessor purchases assets that are then leased
                                    to a given lessee. (p. 858)
16   sale-leaseback arrangement     A lease where a lessee sells assets they already own to the lessor
                                    and, at the same time, commits to leasing them back. (p. 858)
16   leveraged lease                A lease under which the lessor acts as an equity participant,
                                    supplying only about 20 percent of the cost of the asset, while a
                                    lender supplies the balance. (p. 859)
16   maintenance clauses            Provisions normally included in a lease that require one of the
                                    parties to maintain the assets and to make insurance and tax
                                    payments. (p. 859)
16   renewal option                 Grants the lessee the right to re-lease the asset at the expiration of
                                    the lease contract. (p. 859)
16   purchase option                Allows the lessee to purchase the leased asset at maturity for a pre-
                                    specified price, generally the asset’s fair market value. (p. 859)
16   off-balance-sheet financing    Financing that does not have to be shown on the balance sheet, but
                                    only reported in the notes to the financial statements. (p. 861)
16   capitalized lease              As required by Canadian accounting regulations, a financial
                                    (capital) lease that has the present value of the payments included
                                    as an asset and as an offsetting liability on the firm’s balance sheet.
                                    (p. 861)
16   lease-or-purchase question     The question facing firms looking to acquire new fixed assets:
                                    whether to lease the assets or to purchase them using borrowed
                                    funds. (p. 863)
17   hybrid security                A form of debt or equity financing that possesses characteristics of
                                    <I>both</I> debt and equity financing. (p. 901)

17   derivative security            A security that is neither debt nor equity but derives its value from
                                    an underlying asset that is often another security; called
                                    <I>derivative</I> for short. (p. 901)
17   conversion feature             An option that is included as part of a long-term debt or a preferred
                                    share issue that allows its holder to change the security into a stated
                                    number of common shares. (p. 903)
17   convertible bond               A bond that can be changed into a specified number of common
                                    shares. (p. 903)
17   straight bond                  A bond that is nonconvertible, having no conversion feature. (p.
                                    903)

17   convertible preferred shares   Preferred shares that can be changed into a specified number of
                                    common shares. (p. 903)
17   straight preferred shares      Preferred shares that have no conversion feature. (p. 903)


17   conversion ratio               The ratio at which a convertible security can be exchanged for
                                    common shares. (p. 903)
17   conversion price               The per-share price that is effectively paid for common shares as
                                    the result of conversion of a convertible security. (p. 903)
17   conversion (or share) value    The value of a convertible security measured in terms of the market
                                    price of the common shares into which it can be converted. (p. 904)
17   contingent securities          Convertibles, warrants, and stock options. Their presence affects
                                    the reporting of a firm’s earnings per share (EPS). (p. 905)
17   basic EPS                      Earnings per share (EPS) calculated without regard to any
                                    contingent securities. (p. 905)
17   diluted EPS                    Earnings per share (EPS) calculated under the assumption that all
                                  contingent securities that would have dilutive effects are converted
                                  into common shares. (p. 905)
17   overhanging issue            A convertible security that cannot be forced into conversion by
                                  using the call feature. (p. 906)
17   straight bond value          The price at which a convertible bond would sell in the market
                                  without the conversion feature. (p. 907)
17   market premium               The amount by which the market value exceeds the straight or
                                  conversion value of a convertible security. (p. 908)
17   warrant                      An instrument that gives its holder the right to purchase a certain
                                  number of common shares at a specified price within a certain
                                  period of time. (p. 909)
17   exercise price               The price at which holders of warrants can purchase a specified
                                  number of common shares. (p. 910)
17   implied price of a warrant   The price effectively paid for each warrant attached to a bond. (p.
                                  911)
17   warrant premium              The difference between the actual market value and theoretical
                                  value of a warrant. (p. 912)
17   intrinsic value              The positive difference between the current market price of a
                                  firm’s common shares and the exercise price of the warrant. (p.
                                  912)
17   option                       An instrument that provides its holder with an opportunity to
                                  purchase or sell a specified asset at a stated price on or before a set
                                  <I>expiration date</I>. (p. 915)
17   call option                  A security that provides the holder the right to purchase the
                                  common shares of a specific company, on or before a specified
                                  future date, at a stated price. (p. 915)
17   put option                   A security that provides the holder the right to sell the common
                                  shares of a specific company, on or before a specified future date,
                                  at a stated price. (p. 915)
17   option writer                Creates an option contract for sale to option buyers. (p. 915)

17   strike (exercise) price      The stated price at which the holder of the option can exercise the
                                  option. (p. 915)
17   option premium               The price paid by the buyer of an option contract, and the amount
                                  received by the seller; it is quoted on a per-share basis. (p. 916)
17   expiration date              The last day on which the option can be exercised; this is the third
                                  Friday of the month of the option contract. (p. 916)
17   American option              An option contract that may be exercised at any time up to the
                                  expiration date. (p. 916)
17   European option              An option contract that may be exercised only on the expiration
                                  date. (p. 916)
17   Long-Term Equity             A long-term call or put option, on either common shares or stock
     AnticiPation Security        market indexes, with expiration dates that are at least 1 year and up
     (LEAPS)                      to 2.5 to 3 years in the future. (p. 917)

17   zero-sum trade               Profit made by purchasers of options comes at the expense of
                                  sellers; profit made by sellers of options comes at the expense of
                                  purchasers. (p. 918)
17   in the money (call)          When the current price of a company’s common shares
                                  (<I>P</I>) is greater than the call option’s strike price
                                  (<I>S</I>). (p. 920)
17   intrinsic value (option)     The minimum amount an option is worth; this value can never be
                                  less than zero. (p. 920)
17   at the money                 When the current price of a company’s common shares (<I>P</I>)
                                  is equal to the call option’s strike price (<I>S</I>). (p. 920)
17   out of the money (call)    When the current price of a company’s common shares (<I>P</I>)
                                is less than the call option’s strike price (S). (p. 920)
17   out of the money (put)     When the current price of a company’s common shares (<I>P</I>)
                                is greater than the put option’s strike price (<I>S</I>). (p. 920)
17   in the money (put)         When the current price of a company’s common shares (P) is less
                                than the put option’s strike price (<I>S</I>). (p. 920)
17   time value of an option    The difference between the premium (<I>V</I>) and the intrinsic
     (TV)                       value (<I>IV</I>) of an option; all options have some time value
                                up to their point of expiration. (p. 920)
17   Canadian Derivatives       The agency that regulates the trading of options in Canada. (p. 923)
     Clearing Corporation
     (CDCC)
17   open interest              The number of open option contracts at a given time; it indicates
                                the number of open positions that exist for a particular option
                                contract or for all option contracts for a company. (p. 925)
17   future options             Options that trade on currencies, interest rates, and commodities
                                like lumber, corn, cotton, rice, sugar, or gold, or on the level of
                                interest rates in Canada or another country, that are used by
                                companies who wish to protect a position in one of these areas. (p.
                                931)
17   managerial stock options   Options created by the company and granted to senior managers as
                                part of their compensation package; they are often used by publicly
                                traded companies as a way of dealing with the agency issue. (p.
                                932)
17   counterparties             The companies that participate in a swap. (p. 934)
17   notional amount            The dollar amount of the loan that is subject to a swap. (p. 935)
17   vanilla swap               Allows for the simple exchange of fixed for floating interest rate
                                payments; used as a way to hedge or offset risk that exists on their
                                balance sheets, or to benefit from a comparative borrowing
                                advantage. (p. 935)
17   swap dealer                The financial institution, usually a bank, that acts as an
                                intermediary on behalf of the companies engaged in the swap. (p.
                                936)
17   comparative advantage      A situation that exists when the differences in borrowing rates in
                                the fixed and floating rate debt markets for two companies are not
                                equal; the reason a swap opportunity exists. (p. 938)
17   currency swap              Occurs when counterparties exchange fixed or floating interest rate
                                payments in one currency for fixed or floating interest rate
                                payments in another currency; in addition, the notional amount of a
                                currency swap is exchanged. (p. 938)
18   corporate restructuring    The activities involving expansion or contraction of a firm’s
                                operations or changes in its asset or financial (ownership) structure.
                                (p. 959)
18   bidding company (bidder)   The acquiring company; the company making an offer to acquire
                                all or part of another company. (p. 960)
18   target company             The acquired company; the company that is the subject of the
                                bidding company’s interest. (p. 960)
18   merger                     A bidding company acquires and completely absorbs the target
                                company; the bidder maintains its name and identity after the
                                merger. (p. 961)
18   consolidation              Two firms are combined but neither maintain their name, identity,
                                or existence; a completely new company is created. (p. 961)
18   tender offer (merger)      A public offer by the bidder to acquire all of the common shares of
                                the target company at a stated price. (p. 961)
18   acquisition of assets      The bidder acquires all or some of the assets of the target, with the
                                   purchased assets moving to the bidder while the target retains its
                                   liabilities and other contingent claims or unsettled lawsuits. (p.
                                   961)
18   holding company               A corporation that has voting control of one or more other
                                   corporations. (p. 961)
18   subsidiaries                  The companies controlled by a holding company. (p. 961)
18   M&A activity                  The practitioner term used in the financial press for mergers and
                                   acquisitions; it refers to all types of mergers, acquisitions, and
                                   consolidations. (p. 962)
18   friendly merger               A merger transaction endorsed by the target firm’s management
                                   and board, approved by its shareholders, and easily consummated.
                                   (p. 962)
18   hostile takeover              A merger transaction not supported by the target firm’s
                                   management and board, forcing the bidding company to try to gain
                                   control of the firm by buying common shares on the stock market.
                                   (p. 962)
18   strategic merger              A merger transaction undertaken to achieve economies of scale. (p.
                                   962)
18   financial merger              A merger transaction undertaken with the goal of restructuring the
                                   target company to improve its cash flow and unlock its hidden
                                   value. (p. 963)
18   tax loss carryforward         In a merger, the tax loss of one of the firms that can be applied
                                   against the future income of the merged firm over the shorter of
                                   either seven years or until the total tax loss has been fully
                                   recovered. (p. 964)
18   horizontal merger             A merger of two firms in the <I>same line of business</I>. (p.
                                   966)
18   vertical merger               A merger in which a firm acquires a <I>supplier or a
                                   customer</I>. (p. 966)
18   congeneric merger             A merger in which one firm acquires another firm that is <I>in the
                                   same general industry</I> but neither in the same line of business
                                   nor a supplier or customer. (p. 966)
18   conglomerate merger           A merger combining firms in <I>unrelated businesses</I>. (p.
                                   966)
18   leveraged buyout (LBO)        An acquisition technique involving the use of a large amount of
                                   debt to purchase a firm; an example of a </I>financial
                                   merger</I>. (p. 967)
18   synergy                       The extra value created by merging two firms, B and T; the amount
                                   by which the value of T to B (<I>V</I>T^B) exceeds the amount
                                   that B pays for T (<I>P</I><sub>T</sub>). (p. 969)
18   common share exchange         An acquisition method in which the bidding firm exchanges its
                                   common shares for the common shares of the target company
                                   according to a predetermined ratio. (p. 973)
18   ratio of exchange             The amount paid per share of the target company divided by the
                                   market price per share of the bidding firm. (p. 974)
18   ratio of exchange in market   Indicates the market price per share of the acquiring firm paid for
     price                         each dollar of market price per share of the target firm. (p. 978)
18   pooling method                The balance sheets of the two firms are added together (pooled)
                                   with the merged firm’s balance sheet being a combination of the
                                   bidding and target company’s balance sheets. (p. 979)
18   purchase method               The bidding firm determines the fair market value of the target
                                   firm’s assets and these values are reflected in the merged
                                   company’s balance sheet. (p. 979)
18   net fair market value         The market value of the assets acquired, less the amount of the
                                   acquired firm’s debt. (p. 979)
18   goodwill                     The difference between the amount the bidder paid for the target
                                  and the estimated net fair market value of the assets acquired; it
                                  must be greater than zero. (p. 980)
18   investment bankers           Financial intermediaries hired by bidding companies in mergers to
                                  find suitable target companies and assist in negotiations. (p. 982)
18   takeover defences            Strategies for fighting hostile takeovers. (p. 984)
18   white knight                 A takeover defence in which the target firm finds a bidder more to
                                  its liking than the initial hostile bidder and prompts the two to
                                  compete to take over the firm. (p. 984)
18   poison pill                  A takeover defence in which a firm issues securities that give their
                                  holders certain rights that become effective when a takeover is
                                  attempted; these rights make the target firm less desirable to a
                                  hostile bidder. (p. 984)
18   greenmail                    A takeover defence under which a target firm repurchases through
                                  private negotiation a large block of its common shares at a
                                  premium from one or more shareholders to end a hostile takeover
                                  attempt by those shareholders. (p. 984)
18   leveraged recapitalization   A takeover defence in which the target firm pays a large debt-
                                  financed cash dividend, increasing the firm’s financial leverage and
                                  deterring the takeover attempt. (p. 984)
18   golden parachutes            Provisions in the employment contracts of key executives that
                                  provide them with sizeable compensation if the firm is taken over;
                                  deters hostile takeovers to the extent that the cash outflows
                                  required are large enough to make the takeover unattractive. (p.
                                  984)
18   shark repellents             Antitakeover amendments to a corporate charter that constrain the
                                  firm’s ability to transfer managerial control of the firm as a result
                                  of a merger. (p. 984)
18   pyramiding                   An arrangement among holding companies wherein one holding
                                  company controls other holding companies, thereby causing an
                                  even greater magnification of earnings and losses. (p. 985)
18   technical insolvency         Business failure that occurs when a firm is unable to pay its
                                  liabilities as they come due. (p. 989)
18   asset insolvency             A type of failure that occurs when the company’s liabilities exceed
                                  the market value of the company’s assets, meaning the company
                                  cannot satisfy the claims of creditors. (p. 989)
18   bankruptcy                   A legal state resulting in proceedings that can result in the
                                  reorganization of a company, or its liquidation. (p. 989)
18   voluntary settlement         An arrangement between a technically insolvent or bankrupt firm
                                  and its creditors enabling it to bypass many of the costs involved in
                                  legal bankruptcy proceedings. (p. 990)
18   <I>Companies’ Creditors      Allows a company in financial difficulty to resist its creditors and
     Arrangement Act</I>          to negotiate with them in an attempt to avoid bankruptcy and carry
     (CCAA)                       on its business as a going concern. (p. 991)
18   Plan of Arrangement          A creditor- and court-approved plan that allows the debtor
                                  company to survive, provides repayment to both the secured and
                                  unsecured creditors who have extended credit to the business, and
                                  may include payments to both preferred and common shareholders.
                                  (p. 992)
18   secured creditors            Creditors who have specific assets pledged as collateral for the loan
                                  and in the liquidation of the failed firm receive proceeds from the
                                  sale of those assets. (p. 992)
18   unsecured creditors          Creditors who have a general claim against all of the firm’s assets
                                 other than those specifically pledged as collateral. (p. 992)
18   <I>Bankruptcy and           A more recent and regulated solution to insolvency that clearly
     Insolvency Act</I>          specifies the procedures and time line that must be followed by the
                                 debtor and creditors in a reorganization. (p. 992)
18   proposal                    A suggested agreement between the company and the company’s
                                 creditors regarding repayment of the company’s debts. (p. 993)
19   multinational companies     Firms that have international assets and operations in foreign
     (MNCs)                      markets and draw part of their total revenue and profits from such
                                 markets. (p. 1008)


19   North American Free Trade   The treaty establishing free trade and open markets among Canada,
     Agreement (NAFTA)           Mexico, and the United States. (p. 1011)
19   European Union (EU)         A significant economic force currently made up of 25 nations that
                                 permit free trade within the union. (p. 1011)
19   European Open Market        The transformation of the European Union into a single market at
                                 year-end 1992. (p. 1012)
19   Euro                        A single currency adopted on January 1, 1999, by 12 of the 15 EU
                                 nations, who switched to a single set of Euro bills and coins on
                                 January 1, 2002. (p. 1012)
19   monetary union              The official melding of the national currencies of the EU nations
                                 into one currency, the <I>Euro</I>, on January 1, 2002. (p. 1012)
19   Mercosur Group              A major South American trading bloc that includes countries that
                                 account for more than half of total Latin American GDP. (p. 1012)
19   Free Trade Area of the      A trading bloc that would extend the NAFTA and the Mercosur
     Americas                    Group to create a free trade zone from the Arctic to Cape Horn. (p.
                                 1012)
19   General Agreement on        A treaty that has governed world trade throughout most of the
     Tariffs and Trade (GATT)    postwar era; it extends free trading rules to broad areas of
                                 economic activity and is policed by the <I>World Trade
                                 Organization (WTO</I>). (p. 1013)
19   World Trade Organization    International body that polices world trading practices and
     (WTO)                       mediates disputes between member countries. (p. 1013)
19   foreign subsidiary          An incorporated business established by an MNC that is
                                 completely separate from the parent. (p. 1013)
19   branch                      A business run by an MNC that is operated directly within a
                                 foreign country without incorporating; it is not separate from the
                                 parent, but part of the same entity. (p. 1013)
19   foreign affiliate           A foreign corporation in which the MNC owns at least 10 percent
                                 of the common shares. (p. 1013)
19   joint venture               A partnership under which the participants have contractually
                                 agreed to contribute specified amounts of money and expertise in
                                 exchange for stated proportions of ownership and profit. (p. 1013)
19   double taxation             A situation wherein the same income is taxed in two separate
                                 countries; to reduce double taxation, many countries have
                                 negotiated tax treaties that override domestic law. (p. 1015)
19   Euromarket                  The international financial market that provides for borrowing and
                                 lending currencies outside their country of origin. (p. 1017)
19   offshore centres            Certain cities or states (including London, Singapore, Bahrain,
                                 Nassau, Hong Kong, and Luxembourg) that have achieved
                                 prominence as major centres for Euromarket business. (p. 1017)
19   Section 1650                The CICA regulation requiring Canadian companies to convert the
                                 financial statements of foreign subsidiaries into Canadian dollars
                                 for inclusion in the parent company’s consolidated financial
                                 statements. (p. 1019)
19   integrated foreign          An operation that is financially or operationally
     subsidiary                  <I>interdependent</I> with the parent company. (p. 1019)
19   temporal method             The foreign exchange translation method takes all transactions
                                 engaged in by the foreign subsidiary and converts them into
                                 Canadian dollars using the exchange rate in effect on the date of
                                 the original transaction. (p. 1019)
19   self-sustaining foreign     An operation that is financially and operationally
     subsidiary                  <I>independent</I> of the parent company. (p. 1019)
19   current rate method         All financial transactions are measured in the currency of the
                                 foreign operations and consolidation occurs by converting all
                                 balance sheet accounts at the exchange rate in effect at the close of
                                 the fiscal year and all income statement accounts at the average
                                 exchange rate for the fiscal year. (p. 1020)
19   exchange rate risk          The risk caused by varying exchange rates between two currencies.
                                 (p. 1020)
19   foreign exchange rate       The value of two currencies with respect to each other. (p. 1020)
19   floating relationship       The fluctuating relationship of the values of two currencies with
                                 respect to each other. (p. 1021)

19   fixed (or semifixed)        The constant (or relatively constant) relationship of a currency to
     relationship                one of the major currencies, a combination (basket) of major
                                 currencies, or some type of international foreign exchange
                                 standard. (p. 1021)
19   spot exchange rate          The rate of exchange between two currencies on any given day. (p.
                                 1021)

19   forward exchange rate       The rate of exchange between two currencies at some specified
                                 future date. (p. 1021)
19   accounting exposure         The risk resulting from the effects of changes in foreign exchange
                                 rates on the translated value of a firm’s financial statement
                                 accounts denominated in a given foreign currency. (p. 1025)
19   economic exposure           The risk resulting from the effects of changes in foreign exchange
                                 rates on the firm’s value. (p. 1025)
19   political risk              The potential discontinuity or seizure of an MNC’s operations in a
                                 host country due to the host’s implementation of specific rules and
                                 regulations. (p. 1025)
19   macro political risk        The subjection of all foreign firms to political risk (takeover) by a
                                 host country because of political change, revolution, or the
                                 adoption of new policies. (p. 1025)
19   micro political risk        The subjection of an individual firm, a specific industry, or
                                 companies from a particular foreign country to political risk
                                 (takeover) by a host country. (p. 1025)
19   national entry control      Comprehensive rules, regulations, and incentives introduced by
     systems                     host governments to regulate inflows of <I>foreign direct
                                 investments</I> from MNCs and at the same time extract more
                                 benefits from their presence. (p. 1027)
19   foreign direct investment   The transfer by a multinational firm of capital, managerial, and
     (FDI)                       technical assets from its home country to a host country. (p. 1028)
19   international bond          A bond that is initially sold outside the country of the borrower and
                                 often distributed in several countries. (p. 1031)
19   foreign bond                An <I>international bond</I> that is sold primarily in the country
                                 of the currency of the issue. (p. 1031)
19   Eurobond                    An <I>international bond</I> that is sold primarily in countries
                                 other than the country of the currency in which the issue is
                                 denominated. (p. 1031)
19   Euroequity market         The capital market around the world that deals in international
                               equity issues; London has become <I>the</I> centre of
                               Euroequity activity. (p. 1032)
19   Eurocurrency markets      The portion of the Euromarket that provides short-term, foreign-
                               currency financing to subsidiaries of MNCs. (p. 1034)
19   nominal interest rate     In the international context, the stated interest rate charged on
                               financing when only the MNC parent’s currency is involved. (p.
                               1034)
19   effective interest rate   In the international context, the rate equal to the nominal rate plus
                               (or minus) any forecast appreciation (or depreciation) of a foreign
                               currency relative to the currency of the MNC parent. (p. 1034)
19   hedging strategies        Techniques used to offset or protect against risk; in the
                               international context, these include borrowing or lending in
                               different currencies, undertaking contracts in the forward, futures,
                               and/or options markets, and also swapping assets/liabilities with
                               other parties. (p. 1035)