Introduction to Corporate Finance

Glossary

G–13

N

naked option position To buy or to sell
an option, without a simultaneous
position in the underlying asset.

negotiated offer A process used by an
issuer to hire an investment banker
with whom it directly negotiates the
terms of the offer.

net operating profits after taxes
(NOPAT) The amount of earnings
before interest and after taxes, which
equals EBIT × (1 – T), where EBIT is
earnings before interest and taxes and
T equals the corporate tax rate.

net payoff The difference between
the payoff received when the option
expires and the premium paid to
acquire the option.

net present value (NPV) The sum of
the present values of all of a project’s
cash flows, both inflows and outflows,
discounted at a rate consistent
with the project’s risk. Also, the
preferred method for valuing capital
investments.

net present value (NPV) profile The

sum of the present values of all of

a project’s cash flows, both inflows

and outflows, discounted at a rate

consistent with the project’s risk.

NPV is also the preferred method for

valuing capital investments

net profit margin A measure of
profitability that represents the
percentage of each sales dollar
remaining after all costs and
expenses, including interest, taxes,
and preferred share dividends, have
been deducted.

net working capital A measure of a
company’s liquidity calculated by
subtracting current liabilities from
current assets.

nominal return The stated return
offered by an investment; includes the
real return plus any additional return
due to expected inflation.

non-cash charges Expenses, such

as depreciation, amortisation and

depletion allowances, that appear

on the income statement but do not

involve an actual outlay of cash.

non-cash expenses Tax-deductible

expenses for which there is no

corresponding cash outflow in

the current period. They include

depreciation, amortisation and

depletion.

O

open interest The number of a given

type of futures contracts that are

currently outstanding.

opening futures price The price on the

first trade of the day.

operating assets Cash, marketable

securities, accounts receivable and

inventories that are necessary to

support the day-to-day operations of

a company.

operating cash flow (OCF) The amount

of cash flow generated by a company

from its operations. Mathematically,

earnings before interest and taxes

(EBIT) minus taxes plus depreciation.

operating cycle (OC) Measurement

of the time that elapses from the

company’s receipt of raw materials

to begin production to its collection

of cash from the sale of the finished

product.

operating flows Cash inflows and

outflows directly related to the

production and sale of a company’s

products or services.

operating lease A contractual

arrangement whereby the lessee

agrees to make periodic payments

to the lessor, often for five years or

less, to obtain an asset’s services. The

lessee generally receives an option to

cancel, and the asset has a useful life

longer than the lease term.

operating leverage Measures the

tendency of operating cash flow

volatility to increase with fixed

operating costs.

operating profit margin A measure

of profitability that represents the

percentage of each sales dollar

remaining after deducting all costs and

expenses other than interest and taxes.

opportunity costs Forgone cash flows

on an alternative investment that the

company or individual decides not

to make.

option premium The market price of

the option.

order cost The fixed dollar amount per

order that covers the costs of placing

and receiving an order; used in

calculating the EOQ.

ordinary annuity An annuity for which

the payments occur at the end of each

period.

ordinary corporate income Income

resulting from the sale of the

company’s goods and services.

ordinary shares The most basic form

of corporate ownership.

out of the money A call (put) option

is out of the money when the share

price is less (greater) than the strike

price.

oversubscribe When the investment

banker builds a book of orders for

shares that is greater than the amount

of shares the company intends to sell.

ownership right agreements

Agreements between venture capital

investors and portfolio-company

managers allocating ownership

stakes and voting rights to venture

capitalists.

P

paid-in capital in excess of par The

number of ordinary shares outstanding

multiplied by the original selling price

of the shares, net of the par value.

participation rights Agreements giving

the venture capitalists the right to