Glossaryreceiving cash from customers. It is used to assess the
amount invested in working capital. (p. 353)
Operating gearing The extent to which the total cost
of a business operation is fixed irrespective of the
volume of activity, as opposed to varying with the
level of activity. (p. 306)
Opportunity cost The cost incurred when pursuing
one course of action prevents an opportunity to
derive some benefit from an alternative course of
action. (p. 30)
Option The right, but not the obligation, to buy or sell
an asset at a predetermined price on a predeter-
mined date, or range of dates. (p. 15)
Ordinary shares Shares of a business owned by those
who are due the benefits of the business’s activities
after all obligations to other stakeholders have been
satisfied. Also known as equities. (p. 12)
Outsourcing Having some activity that could be
undertaken by the business subcontracted to an
outside supplier. (p. 435)
Overtrading Operating at a level of activity that is
beyond the level that a particular business’s working
capital can sustain. (p. 359)
Par value SeeNominal value. (p. 220)
Payback period An investment appraisal technique
that assesses how long it takes for the initial cash
investment to be repaid from the cash receipts from
the investment. (p. 95)
Pecking order theory The notion that businesses
tend to favour new sources of finance in a hierarchy
of desirability, with retained profit at the top and
public equity issues at the bottom. (p. 313)
Portfolio A set of assets, real or financial, held by an
investor. (p. 164)
Portfolio theory A set of principles relating risk and
return for a portfolio, based on the risk/return
profiles of the constituent portfolio assets. (p. 185)
Position analysis A step in the strategic planning
process in which the business assesses its present
position in the light of the commercial and economic
environment in which it operates. (p. 136)
Post audit A review of the performance of an invest-
ment project to see whether actual performance
matched planned performance and whether any
lessons can be drawn from the way in which the
investment was originally assessed or carried out.
(p. 133)
Preference shares Shares of a business owned by
those who are entitled to the first part of any divi-
dend that the business might pay. (p. 13)
Primary capital market A market in which new fin-
ance is raised by businesses and other organisations.
(p. 218)Private equity funds Investment vehicles that pool
funds raised privately from large investors. The funds
are often used to buy listed businesses, delist them,
replace senior management and typically increase
levels of borrowing. The funds then typically resell
the businesses. (p. 16)
Profit and loss account SeeIncome statement.
(p. 42)
Profitability index The net present value of an invest-
ment divided by the initial investment required.
(p. 127)
Purchasing power parity A theoretical explanation
of relative foreign currency exchange rates. It main-
tains that the exchange rate between two currencies
will adjust in the light of different rates of inflation
to ensure that the same product or service will have
the same equivalent cost in both currency areas.
(p. 415)
Real assets Business productive assets, as opposed
to financial assets. (p. 4)
Real options Options that are based on business
choices and their anticipated cash flows, rather than
on values of individual assets. (p. 143)
Real terms A cash flow and/or cost of capital
expressed in real terms ignores inflation, that is, it
treats the rate of inflation as zero. (p. 120)
Return on investment SeeAccounting rate of return.
(p. 97)
Rights issues Issues, usually of ordinary shares
issued for cash, to existing shareholders, such that
each shareholder has a right to subscribe for a num-
ber of new shares, whose quantity depends on how
many ordinary shares are already held. (p. 229)
Risk The possibility that what is projected to occur
may not actually occur. (p. 5)
Risk-averse Being prepared to take a risk only where
the expected value of the payoff is greater than the
cost of entry to the project. (p. 169)
Risk-free asset Lending at the risk-free rate. (p. 196)
Risk-free rate The rate of interest that is obtainable
from the risk-free asset, that is, a rate that contains no
element of risk premium. (p. 196)
Risk-loving Being prepared to take a risk even where
the expected value of the payoff is less than the cost
of entry to the project, provided that at least one
possible outcome has a value greater than the cost of
entry. (p. 171)
Risk-neutral Being prepared to take a risk where the
expected value of the payoff is equal to the cost of
entry to the project. (p. 171)
Sale and leaseback An arrangement where the
owner and user of an asset sells it to a financial insti-
tution subsequently to lease it back for the remainderBUSF_Z04.qxd 11/19/08 10:34 Page 503