GlossaryG–15projects such as toll roads, bridges
and power plants.Proposition I The famous ‘irrelevance
proposition,’ which asserts that
the market value of any company
equals the value of its assets and
is independent of the company’s
capital structure. Company value
is calculated by discounting the
company’s expected EBIT at the
rate ra, appropriate for the company’s
business risk.Proposition II Asserts that if we hold
the required return on assets (ra)
and the required return on debt (rd)
constant, the expected return on
levered equity (rl) increases with the
debt-to-equity ratio.proprietary limited company A
company form with between two and
five shareholders with limited liability,
that creates an organisational form
separate from individuals.
prospectus A document that contains
extensive details about the issuer and
describes the security it intends to
offer for sale.protective covenants Provisions in a bond
indenture that specify requirements
the borrower must meet (positive
covenants) or things the borrower must
not do (negative covenants).protective put A portfolio containing a
share and a put option on that share.
proxy fight An attempt by outsiders to
gain control of a company by soliciting
a sufficient number of votes to elect
a new slate of directors and effect a
change in company policy.proxy statements Documents that
describe the issues to be voted on at
an annual shareholders meeting.
public company A company, the
shares of which can be freely traded
among investors without obtaining
the permission of other investors and
whose shares are listed for trading in a
public securities market.public-to-private transactions The
transformation of a public corporation
into a private company through
issuance of large amounts of debt
used to buy the outstanding shares of
the corporation.
purchase option An option allowing
the lessee to purchase the leased asset
when the lease expires.
purchasing (or procurement) card
programs Programs in which a
company issues designated employees
purchasing cards with spending
limits, usable only at stipulated
vendors.
pure discount bonds Bonds that pay no
interest and sell below par value. Also
called zero-coupon bond.
pure share exchange merger A merger
in which shares are the only mode of
payment – such acquisition bids are
also known as a scrip bids.
putable bonds Bonds that investors
can sell back to the issuer at a
predetermined price under certain
conditions.
put-call parity A relationship that links
the market prices of shares, risk-free
bonds, call options and put options.
put option An option that grants the
right to sell an underlying asset at a
fixed price.Q
quarterly compounding Interest
compounds four times per year.
quick (acid-test) ratio A measure of
a company’s liquidity that is similar
to the current ratio except that it
excludes inventory, which is usually
the least-liquid current asset.R
random walk When next period’s value
for a variable equals this period’s value
plus or minus a random shock. When
financial asset prices follow a random
walk, future and past prices are
statistically unrelated, and the bestestimate of the future price is simply
the current price.
ratchet provisions Contract terms
that adjust downward the par value
of the shares venture capitalists have
purchased in a company in case the
company must sell new shares at a
lower price than the VC originally
paid.
ratio analysis Calculating and
interpreting financial ratios to
assess a company’s performance and
status.
real option The right, but not
the obligation, to take a future
action (e.g., cancel or delay) when
implementing a project. Note
that these actions can change an
investment’s value.
real return The inflation-adjusted
return; approximately equal to the
difference between an investment’s
stated or nominal return and the
inflation rate.
recapitalisation Alteration of a
company’s capital structure to change
the relative mix of debt and equity
financing.
receivership An insolvency procedure
where a receiver, or receiver and
manager, is appointed over some or all
of the company’s assets.
record date The date on which the
names of all persons who appear as
shareholders are entitled to receive a
dividend.
redemption option Option for venture
capitalists to sell a company back to
its entrepreneur or founders.
refund To refinance a debt with new
bonds.
renewal option In an operating lease,
an option that allows the lessee to
renew the lease at its expiration.
repurchase rights Give the venture
capitalists the right to force the
company to buy back (repurchase)
the shares held by the VC.