Introduction to Corporate Finance

Glossary

G–19

calculated by dividing the dollars of

sales a company generates by the

dollars of total asset investment.

total cost The sum of the order
costs and the carrying costs that is
minimised using the economic order
quantity (EOQ) model.

total return A measure of the

performance of an investment that

captures both the income it paid out

to investors and its capital gain or loss

over a stated period of time.

total variable cost of annual sales
(TVC) Calculated by multiplying
the annual sales in units by the total
variable cost per unit and used to
estimate the average investment in
accounts receivable under a stated
policy.

tracking stocks Equity claims based

on (and designed to mirror, or

track) the earnings of wholly owned

subsidiaries of diversified firms.

trade-off model of corporate
leverage According to this model
managers trade off the costs and
benefits of using debt to choose
the amount of debt that maximises
company value as expressed in
Equation 13.7b (page 486).

transactions exposure The risk that a

change in prices will negatively affect

the value of a specific transaction or

series of transactions.

transactions motive A motive

for holding cash and short-term

investments in order to make planned

payments for items such as materials

and wages.

Treasury bills Treasury bills are

the US equivalent of Australian

Treasury notes. Bills are forms of

debt investment and may be referred

to as debt securities or fixed income

assets.

Treasury bonds Debt instruments

issued by the federal government that

mature between one and 15 years.

treasury stock (shares) Ordinary

shares that were issued and later

reacquired by the company through

share repurchase programs and are

therefore being held in reserve by the

company.

triangular arbitrage A trading strategy

in which traders buy a currency in

a country where the value of that

currency is too low and immediately

sell the currency in another country

where the currency value is too high,

to make a risk-free profit.

trustee In bankruptcy, someone

appointed by a judge to take over the

debtor’s assets with the primary objective

of maximising liquidation value.

trustee (bond) A third party to a bond

indenture that acts as a watchdog on

behalf of the bondholders, making

sure that the issuer does not default

on its contractual responsibilities.

turnover of accounts receivable

(TOAR) Three-hundred-sixty-five

divided by the average collection

period (ACP). Used to calculate

the average investment in accounts

receivable (AIAR) when evaluating

accounts receivable policies.

U

underinvestment When shareholders

decide not to invest in a positive

NPV project, and therefore

‘underinvest’ relative to choosing all

positive NPV projects.

underlying asset The asset from

which an option or other derivative

security derives its value.

underwrite The investment banker

purchases shares from a company and

resells them to investors.

underwriting spread The difference

between the net price and the

offer price of an underwritten security

issue.

unsecured debt Debt instruments

issued by an entity which is backed

only by the general faith and credit of

the borrowing company.

unsystematic risk Risk that can be

eliminated through diversification.

V

variable growth model Assumes that

the dividend growth rate will vary

during different periods of time, when

calculating the value of a company’s

shares.

variance A measure of dispersion

of observations around the mean

of a distribution; it is equal to the

expected value of the sum of squared

deviations from the mean divided

by one less than the number of

observations in the sample.

venture capital A professionally

managed pool of money raised for the

purpose of making actively managed

direct equity investments in rapidly

growing private companies.

venture capitalists Professional

investors who specialise in making

high-risk, high-return investments

in rapidly growing entrepreneurial

businesses.

venture capital limited partnerships

Funds established by professional

venture capital companies, and

organised as limited partnerships.

vertical merger Companies with

current or potential buyer–seller

relationships combine to create a

more integrated company.

voluntary administration Occurs when

a company allows an administrator

to investigate and report on the

company to creditors and make a

recommendation about the future of

the company.

W

warrants Securities that grant rights

similar to a call option, except that

when a warrant is exercised, the

company must issue a new share,