G–1GLOSSARY
A
ABC system An inventory control
system that segregates inventory into
three groups – A, B and C. A items
require the largest dollar investment
and the most intensive control,
B items require the next largest
investment and less intensive control
and C items require the smallest
investment and least intensive control.accounting rate of return Return on
investment calculated by dividing net
income by the book value of assets.
accounts payable management A
short-term financing activity that
involves managing the time that
elapses between the purchase of raw
materials and mailing the payment to
the supplier.
accredited investors Individuals or
institutions that meet certain income
and wealth requirements.
accrual-based approach Revenues
are recorded at the point of sale and
costs when they are incurred, not
necessarily when a company receives
or pays out cash.acquisition The purchase of resources,
assets or another company.
actively managed A strategy in which
an investor does research in an
attempt to identify undervalued and
overvalued shares.
activity ratios A measure of the speed
with which a company converts
various accounts into sales or cash.
administrator A person appointed
to manage the process of resolving
a company’s future in place of the
directors and management of the
company.
ageing of accounts receivable A
schedule that indicates the portions of
the total accounts receivable balancethat have been outstanding for
specified periods of time.
agency cost/contracting model A
theoretical model that explains
empirical patterns in dividend
payment and share repurchase data
based on the belief that paying
dividends allows a company to
overcome agency problems between
managers and shareholders.
agency costs Costs that arise from
conflicts of interest between
shareholders and managers.
agency costs of debt Costs that
arise because shareholders and
bondholders have different
objectives.
agency costs of (outside) equity The
value-reducing actions that
managers take when ownership
(by shareholders) is separated from
control by managers.
agency problems The conflict
of interest between the goals
of a company’s owners and its
managers.
aggressive strategy Financing strategy
in which a company relies heavily
on short-term borrowing, not only to
meet the seasonal peaks each year but
also to finance a portion of the long-
term growth in sales and assets.
all-in rate The base rate plus the spread
on a short-term variable rate loan.
American call option An option that
grants the right to buy an underlying
asset, on or before the expiration date.
American depositary receipts
(ADRs) Dollar-denominated claims,
issued by US banks, that represent
ownership of shares of a foreign
company’s equity held on deposit
by the US bank in the issuing firm’s
home country.angel capitalists Wealthy individuals
who make private equity investments
on an ad hoc basis.
announcement date The day a
company declares the amount of
the dividend, plus the dividend
record and payment dates to the
public.
annual percentage yield (APY) The
annual rate of interest actually paid
or earned, reflecting the impact of
compounding frequency. The same as
the effective annual rate (sometimes
called the effective APR).
annuity A stream of equal periodic
cash flows over a stated period of time.
annuity due An annuity for which the
payments occur at the beginning of
each period.
appreciate A currency appreciates
when it buys more of another
currency than it did previously.
arbitrage The process of buying
something in one market at a low price
and simultaneously selling it in another
market at a higher price to generate an
immediate, risk-free profit.
ask price The price at which a market
maker offers to sell a security; the price
at which an investor can purchase a
security.
asset sale Assets of one company are
sold to another organisation, usually
for cash.
asset substitution When shareholders
choose risky projects that benefit
themselves but reduce the value of
bondholders.
assets-to-equity (A/E) ratio A measure
of the proportion of total assets
financed by a company’s equity. Also
called the equity multiplier.
asymmetric information The situation
that exists when managers of the