GlossaryG–14
participate in any sale of shares that a
portfolio company’s managers might
arrange for themselves.
partnership A proprietorship with two
or more owners who have joined their
skills and personal wealth.
par value (ordinary shares) An
arbitrary value assigned ordinary
shares on a company’s balance sheet.
passively managed A strategy in
which an investor makes no attempt
to identify overvalued or undervalued
shares, but instead holds a diversified
portfolio.
payback period The amount of time
it takes for a project’s cumulative
net cash inflows to recoup the initial
investment.
payment pattern The normal timing
in which a company’s customers
pay their accounts, expressed as the
percentage of monthly sales collected
in each month following the sale.
payoff The value received from
exercising an option on the expiration
date (or zero), ignoring the initial
premium required to purchase the
option.
payoff diagrams A diagram that shows
how the expiration date payoff from
an option or a portfolio varies, as the
underlying asset price changes.
payout policy The choices managers
make about distributing a company’s
cash – paying regular or ‘special’
dividends or repurchasing shares – to
shareholders.
pecking-order theory A hypothesis
that assumes managers are better
informed about investment
opportunities faced by their
companies than are outside investors.
percentage-of-sales method Method of
constructing pro forma statements by
assuming all items grow in proportion
to sales.
perpetuity A level cash flow stream
that continues forever.plug figure A line item on the pro
forma balance sheet that represents
an account that can be adjusted after
all other projections are made.
portfolio weights The percentage
invested in each of several securities
in a portfolio. Portfolio weights must
sum to 1.0 (or 100%).
positive pay A bank service used to
combat the most common types of
cheque fraud. A company transmits
a cheque-issued file, designating the
cheque number and amount of each
item, to the bank when the cheques
are issued. The bank matches the
presented cheques against this file and
rejects any items that do not match.
pre-emptive rights These hold that
shareholders have first claim on anything
of value distributed by a corporation.
preferred habitat theory A theory that
recognises that the shape of the yield
curve may be influenced by investors
who prefer to purchase bonds having
a particular maturity; also called
market segmentation theory.
preferred shares A form of ownership
that has preference over ordinary
shares when the company distributes
income and assets.
premium A bond trades at a premium
when its market price exceeds its face
or par value.
present value The value today of a
cash flow to be received at a specific
date in the future, accounting for
the opportunity to earn interest at a
specified rate.
price/earnings (P/E) ratio A measure
of a company’s long-term growth
prospects that represents the amount
investors are willing to pay for each
dollar of a company’s earnings.
primary issues Initial sale of securities
by a company to raise capital.
primary-market transactions Cash
sales of securities to investors by a
corporation to raise capital.prime cost method A method of
depreciating assets, accepted by the
Australian Taxation Office, whereby
assets are depreciated by a set value
every year. It is analogous to the
reducing straight-line depreciation
used in accounting, and effectively
means that the asset will be reduced
by the same amount each year until
it has zero value. The prime cost rate
is calculated by obtaining the inverse
of the effective asset life. Thus prime
cost rate = (1/effective asset life) ×
100%.
prime rate The rate of interest charged
by largest banks on short-term loans
to business borrowers with excellent
credit records.
principal The amount of money
borrowed on which interest is paid.
private equity Financing provided
either through capital investments
by current owners or through
funding by professional venture
capitalists or private investors,
rather than through public equity
markets, as is typically the case for
listed companies Thus, the private
equity asset class is an example of an
unlisted asset class.
private placement Unregistered
security offerings sold directly to
accredited investors.
pro forma financial statements A
forecast of what a company expects its
income statement and balance sheet
to look like a year or two ahead.
processing float The time that elapses
between the receipt of a payment by
a company and its deposit into the
company’s account.
profitability index (PI) A capital
budgeting tool, defined as the present
value of a project’s cash inflows
divided by the absolute value of its
initial cash outflow.
project finance (PF) loans Loans
usually arranged for infrastructure