GlossaryG–3to repay their debts. Lower ratings
signify higher default risk.bonus share issue The payment to
existing shareholders of a dividend in
the form of shares.book building A process in which
underwriters ask prospective investors
to reveal information about their
demand for the offering.bookrunner The lead underwriter in a
security issue.book value The value of equity as
shown on the company’s balance
sheet.bottom-up sales forecast A sales
forecast that relies on the assessment
by sales personnel of demand in
the coming year on a customer-by-
customer basis.breakeven point (BEP) The level
of sales or production that a
company must achieve in order
to fully cover all costs. Sales or
production above the BEP results
in profits.
bulge bracket Consists of firms that
generally occupy the lead or co-lead
manager’s position in large, new
security offerings.
business failure A company’s inability
to stay in business.business risk The variability of a
company’s cash flows, as measured by
the variability of EBIT.bust-up The takeover of a company
that is subsequently split up.
C
callable (bonds) Bonds that the issuer
can repurchase from investors at a
predetermined price known as the
call price.
call option An option that grants the
right to buy an underlying asset at a
fixed price.call premium The amount by which
the call price exceeds the par value
of a bond. Paid by corporations to
buy back outstanding bonds prior to
maturity.
call price The price at which a bond
issuer may call or repurchase an
outstanding bond from investors.
cancellation option Option held
by the venture capitalist to deny
or delay additional funding for a
portfolio company.
cannibalisation Loss of sales of a
company’s existing product when a
new product is introduced.
capital asset pricing model
(CAPM) States that the expected
return on a specific asset equals the
risk-free rate plus a premium that
depends on the asset’s beta and the
expected risk premium on the market
portfolio.
capital budgeting The process of
determining which long-lived
investment projects a company should
undertake.
capital budgeting function The
activities involved in selecting the
best projects in which to invest the
company’s funds based on their
expected risk and return. Also called
the investment function.
capital gain The increase in the price
of an asset that occurs over a period
of time.
capital indexed bonds or inflation
linked bonds Bonds issued by the
Australian government in which the
face value is changed each year in line
with inflation.
capital loss The decrease in the price
of an asset that occurs over a period
of time.
capital rationing The situation
where a company has more
positive NPV projects than its
available budget can fund. It
should choose the combination
of those projects that maximises
shareholder wealth.carried interest A performance or
incentive fee, paid to the general
partner, which is often equal to 20%,
on the realised return on the fund’s
investments.
carrying cost The variable cost per unit
of holding an item in inventory for
a specified period of time. Used in
calculating the EOQ.
cash application The process
through which a customer’s
payment is posted to its account and
the outstanding invoices are cleared
as paid.
cash budget A statement of a
company’s planned inflows and
outflows of cash.
cash concentration The process
of bringing the lockbox and other
deposits together into one bank,
often called the concentration
bank.
cash conversion cycle (CCC) The
elapsed time between the points
at which a company pays for raw
materials and at which it receives
payment for finished goods.
cash disbursements All outlays of cash
by a company in a given period.
cash discount A method of lowering
investment in accounts receivable by
giving customers a cash incentive to
pay sooner.
cash flow approach Used by financial
professionals to focus attention on
current and prospective inflows and
outflows of cash.
cash flow from operations Cash inflows
and outflows directly related to the
production and sale of a company’s
products and services. Calculated
as net income plus depreciation and
other non-cash charges.
cash manager A financial specialist
responsible for managing the cash
flow time line related to collection,
concentration, and disbursement of
the company’s funds.