CORPORATE FINANCE GLOSSARY

Accounts Payable
Amounts owed by an organisation or individual to another for goods or services it has
received.
Accounts Receivable
Amounts due to an organisation or individual from another for goods or services it has
supplied.
Accrual
A term used in company accounts where income is due or a cost is incurred during an
accounting period but has not been received or paid.
Acid Test Ratio
A financial ratio similar to the current ratio or working capital ratio, defined as: current
assets minus stocks divided by current liabilities. It shows whether a company would be
able to pay its debts if it needed to satisfy creditors but it had no time to sell any of its
assets.
Amortisation
An annual charge made in a company's profit and loss account to reduce the value of an
intangible asset to zero over a period of years. A common example has been goodwill
amortisation, but that has been abolished under international accounting standards. The
goodwill, acquired through a takeover, is instead subjected to an annual impairment test.
Arbitrage
The simultaneous purchase and sale of two different, but closely related, securities to take
advantage of a disparity in their prices.
Authorised Share Capital

The total number of shares a company is authorised to issue by reference to its

memorandum and articles of association.
Balloon Payment
Large final payment of loan
Beta Value
a measurement of the movement of the price of a particular stock compared with the
movement of the market as a whole over the same period.

Bid Price
The price at which a market maker will buy a security which could be shares, warrants or,
in the case of unit trusts, the price at which units will be bought back from their holders.
Bid prices for shares are quoted on the London Stock Exchange SEAQ system, and
displayed live on brokers computer screens. The prices are only firm for quantities
within the normal market size of a stock, limiting the ability to sell a large quantity of
shares in, for example, a small AIM stock.

Bond
The generic name for a tradable loan security issued by governments and companies as a
means of raising capital. The bond guarantees its holder both the repayment of capital at a
future specified date (the maturity date) and a fixed rate of interest (also known as the
coupon).
Conglomerate Merger
Merger of companies in unrelated business
Credit Period
The length of time customers are allowed for their credit purchases
Current Assets
Asset which normally get converted into cash during the operating cycle of the firm

Current Liabilities
Liabilities those are normally payable in a year
Days Sales outstanding
The ratio of receivable outstanding to average daily sales
Debenture
An instrument for long term debt. Debentures in India are typically owned.
Degree of Financial Leverage
The percentage change in earning per share as result of one percent change in earning
before interest & taxes
Degree of Operating Leverage
Percent change in earning before interest & taxes as result on one percent change in sales

Depreciation
A write-off of part of an asset annually. This is charged to the income statement
Diversifiable Risk
The portion of securitys risk that can be eliminated by diversification
Dividend Discount Model
A Model that calculates value of an equity share as the present value of future dividends
expected from it.
Dividend Payment
Payment made by company to its shareholders
Dividend Yield
Annual dividend stated as percentage of share market price
EBIT
Abbreviation of earning before interest & tax
EPS
Earning per share
Equity
The net worth of the firm consisting of paid up equity capital plus reserve & surplus

Exercise price
Price at which the call option or put option exercisable
Expiration Date
The last date by which an option can be exercised
Face Value
The value of a bond, note or other security as printed on the document. Throughout the
life of a security, its market price will fluctuate but at maturity the face amount is payable
Factoring
Arrangement whereby financial institutions provides services relating to management &
factoring of debts arising from credit sales
Financial Assets
A piece of paper representing claim on real assets

Financial Risk
The risk which arises from the use of debt capital
First In First Out
Method of inventory pricing which assumes that the order in which materials are received
in the stores is the order in which materials are issued from the stores
Float
Funds represented by the cheques which have been issued but which have not been
collected
Forward Contract
An agreement between two parties to exchange an assets for cash at pre-determined
future date for price that is specified today
Free Cash flow
Surplus cash generated by a firm after meeting its investment requirements
Funded Debt
Debt that matures after one year
Goodwill

The value of a business to a purchaser over and above its net asset value
Greenshoe Option
Option allowing a company issuing securities to retain excess subscription upto certain
extent.
Hedge Ratio
Number of shares to be brought for each option sold to create a riskless position
Horizontal Merger
A merger between two or more firms engaged in the same line of activity
Hurdle Rate
In investment decision making, the minimum acceptable rate of return on a project
Incremental analysis
Analysis of the additional cost s or benefits of one alternative vis--vis another
Initial Public Offering
The first issue of Companys equity

Internal Rate of Return

The rate of discount at which the net present value of an investment is zero
Intrinsic Value
An expression used in options and warrants trading which indicates the difference
between the exercise price of the option/warrant and current price of the underlying
instrument (shares, an index, commodity, etc)
IRR
Internal Rate of Return
Lease
A contract in which the legal owner of property or other asset agrees to another person
using that property or asset in return for a regular specified payment (known as rent) over
a set term. In addition to buildings, other items such as cars and computers are often
leased in order to avoid capital costs in the running of a business.
Leverage Buyout

An acquisition that is largely financed by the debt

Liquidity
A Firms liquidity refers to its ability to meet obligation in short run. An assets liquidity
refers to how quickly it can be sold at a reasonable price
Marking- to- Market
An arrangement wherein profits or losses on a futures contract are settled every day.
Merger
The process by which two companies become one. If the companies are listed, the merger
may be by agreement, or hostile. A hostile bid is one in which the directors of the target
company reject the approach, but it is still possible for the predator company to obtain
control if enough of the target's shareholders accept its offer.
Mortgage
A pledge of specific property offered as security for a loan
Net Present Value
Net Present Value is defined as present value of benefits minus present value of cost
Net Working Capital
Net Working Capital is the difference between the total current assets & the total current
liabilities

Net Worth
A measure of the difference between the total value of assets and total indebtedness. Also
known as net assets.
Off balance Sheet Financing
Financing that does not figure on the balance sheet of the firm
Operating Cycle
The Operating Cycle of the firm begins with the acquisitions of raw materials amd ends
with the collection of receivables
Operating lease

A short term cancellable lease arrangements which is not fully amortised

Operating Leverage
The leverage arising from fixed operations costs
Opportunity Costs
The rate of return that can be earned on the best alternative investment
Option
The right buy or sell something on or before a given date at a predetermined price
P/E Ratio
The ratio of share price to earning per share
Payback period
The length of time required for an asset to generate cash flow just enough to cover initial
outlay
Payment Float
The Amount of cheques issued by the firm but not paid for by the bank
Perpetuity
A perpetual annuity
Pooling interest
A method for accounting for merger s in which there is there is a line by line addition of
balance sheets of merging entities
Portfolio
A combination of assets

Portfolio Effects
The extent to which the variability of the returns on a portfolio is less than the sum of
variability of an individual assets in the portfolio
PBIT
An abbreviation for profit before interest & taxes
Primary Market
The market in which new securities are issued
Profit Margin

Operating profit as a percentage of sales (or turnover). Profit margin tells you about the
underlying profitability of a companys trading activities, and is calculated before taking
account of interest charges or tax. Sometimes known as return on sales.
Project Finance
Project Finance is the principal arrangement for private sector participation in
infrastructure project which heavily depends on debt
Put Option
An option that gives its holder the right to sell an asset at fixed price during a certain
period
Put Call Parity Relation
A relation between the price of the Put, the price of the call, the price of the underlying
security & the present value of the exercise price
Reinvestment Rate
The rate of return at which the intermediate cash inflows of the project may be invested
Required rate of return
Rate of return required by investors on their investment
Retained earning
The proportion of earnings to net worth
Return on equity
The ratio of equity earnings to net worth
Risk adjusted discount rate
The discount rate applicable to risky investments. It is equal to risk free rate of return
plus risk premium.

ROI
Return on investment
Safety Stock
Inventories carried to protect against the variations in sales rate, production rate &
procurement time
Sale & Leaseback
A special lease agreement under which firm sells an assets to another firm &
simultaneously leases it back

Salvage value
The value realized from disposal of an assets
Secondary Market
The Market for outstanding securities
Specific Risk
Unique risk or diversifiable risk
Spin-off
Separating division of accompany into an independent company.
Stock Split
In stock spilt, the par value is reduced & the number of share is increased proportionately
Subscription Price
The price at which the issue of security can be subscribed by an investors
Swap contract
A contract that involves an exchange of one set of financial flows for another
Synergy
Gain from combination of two or more units.
Systematic Risk
Risk that can not be diversified away. Market risk or non diversifiable risk
Term Loan
A loan which is generally repayable in more than one year & less than ten year
Turnover Ratios
Turnover Ratios measures how efficiently the assets that are employed by the firm

Unfunded Debt
Debt that Matures in less than one year
Unique Risk
Risk that can not be diversified away
Unsystematic risk
Risk that can be diversified away.
WACC
Weighted average cost of capital

Working Capital
A company's current assets (cash, debtors, work in progress) less its current liabilities
(creditors, taxes due). This capital is used by a company to run its business.
Yield Curve
A curve representing the promised yield to maturity of debt instruments of a given risk &
maturity of the instruments
Yield to Maturity
The rate of return earned on security if it is held till maturity.
Zero Coupon Bond
A bond that makes no coupons payments & is issued at a steep discount over its face
value.