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percentage of sales models

payment float: Checks written by a company that have not yet cleared.

payout ratio: Fraction of earnings paid out as dividends.

P/E: See price-earnings multiple.

pecking order theory: Firms prefer to issue debt rather than equity if internal finance is insufficient.

percentage of sales models: Planning model in which sales forecasts are the driving variables and most other variables are proportional to sales.

perpetuity: Stream of level cash payments that never ends.

planning horizon: Time horizon for a financial plan.

plowback ratio: Fraction of earnings retained by the firm.

poison pill: Measure taken by a target firm to avoid acquisition; for example, the right for existing shareholders to buy additional shares at an attractive price if a bidder acquires a large holding.

preferred stock: Stock that takes priority over common stock in regard to dividends.

present value (PV): Value today of a future cash flow.

present value of growth opportunities (PVGO): Net present value of a firm`s future investments.

price-earnings (P/E) multiple: Ratio of stock price to earnings per share.

primary market: Market for the sale of new securities by corporations.

prime rate: Benchmark interest rate charged by banks.

private placement: Sale of securities to a limited number of investors without a public offering.

pro formas: Projected or forecasted financial statements.

profitability index: Ratio of net present value to initial investment.

project cost of capital: Minimum acceptable expected rate of return on a project given its risk.

prospectus: Formal summary that provides information on an issue of securities.

protective covenant: Restriction on a firm to protect bondholders.

proxy contest: Takeover attempt in which outsiders compete with management for shareholders` votes. Also called proxy fight.

purchasing power parity (PPP): Theory that the cost of living in different countries is equal, and exchange rates adjust to offset

inflation differentials across countries.

put option: Right to sell an asset at a specified exercise price on or before the exercise date.

PV: See present value.

random walk theory: Security prices change randomly, with no predictable trends or patterns.

rate of return: Total income per period per dollar invested.

real assets: Assets used to produce goods and services.

real interest rate: Rate at which the purchasing power of an investment increases.

real options: Options embedded in real assets.

real value of $1: Purchasing power adjusted value of a dollar.

reorganization: Restructuring of financial claims on failing firm to allow it to keep operating.

residual income: Also called economic value added. Profit minus cost of capital employed.

restructuring: Process of changing the firm`s capital structure without changing its assets.

retained earnings: Earnings not paid out as dividends.

rights issue: Issue of securities offered only to current stockholders.

risk premium: Expected return in excess of risk-free return as compensation for risk.

S&P: Abbreviation for Standard & Poor`s stockmarket index.

scenario analysis: Project analysis given a particular combination of assumptions.

seasoned offering: Sale of securities by a firm that is already publicly traded.

SEC: See Securities and Exchange Commission.

secondary market: Market in which already issued securities are traded among investors.

secured debt: Debt that has first claim on specified collateral in the event of default.

Securities and Exchange Commission (SEC): Federal agency responsible for regulation of securities markets in the United States.

security market line: Relationship between expected return and beta.

semi-strong-form efficiency: Market prices reflect all publicly available information.

sensitivity analysis: Analysis of the effects of changes in sales, costs, and so on, on project profitability.

shark repellent: Amendments to a company charter made to forestall takeover attempts.

shelf registration: A procedure that allows firms to file one registration statement for several issues of the same security.

shortage costs: Costs incurred from shortages in current assets.

short position: The sale of an investment, particularly by someone who does not yet own it.

simple interest: Interest earned only on the original investment; no interest is earned on interest.

simulation analysis: Estimation of the probabilities of different possible outcomes, e.g., from an investment project.

sinking fund: Fund established to retire debt before maturity.

sole proprietor: Sole owner of a business which has no partners and no shareholders. The proprietor is personally liable for all the firm`s obligations.

spot rate of exchange: Exchange rate for an immediate transaction.

spread: Difference between public offer price and price paid by underwriter.

stakeholder: Anyone with a financial interest in the firm.

Standard & Poor`s Composite Index: Index of the investment performance of a portfolio of 500 large stocks. Also called the S&P 500.