GlossaryG–16
required rate of return The rate of
return that investors expect or require
an investment to earn given its risk.
residual claimants Investors who have
the right to receive the cash that
remains after a company pays all of
its bills and makes necessary new
investments in the business.
residual income measure (RIM) The
present value of the difference
between the forecast expected future
(accounting) income for equity in a
company and the expected future
required income. The measure can
be used to value equity if the income
measures and book values of equity
are known, even if no dividends are
being paid.
residual theory of dividends Observed
dividend payments are simply a
residual, the cash left over after
corporations have funded all their
positive-NPV investments.
resource complementarities A
company with a particular operating
expertise merges with a company
with another operating strength to
create a company that has expertise in
multiple areas.
retained earnings The cumulative total
of the earnings that a company has
reinvested since its inception.
return on investment (ROI) A measure
of a company’s overall effectiveness in
using its assets to generate returns to
ordinary shareholders; also, return on
total assets (ROA).
return on ordinary equity (ROE) A
measure that captures the return
earned on the ordinary shareholders’
(owners’) investment in a company.
return on total assets (ROA) A
measure of the overall effectiveness
of management in generating returns
to ordinary shareholders with its
available assets.
reverse LBO (or second IPO) A
formerly public company that haspreviously gone private through a
leveraged buyout and then goes public
again. Also called a second IPO.
reverse share splits Occur when a
company replaces a certain number of
outstanding shares with just one new
share to increase the share price.
reverse triangle merger When a
subsidiary of the bidder merges with
the target company.
rights offerings A special type of
seasoned equity offering that allows
the firm’s existing owners to buy new
shares at a bargain price or to sell that
right to other investors.
risk management The process of
identifying company-specific risk
exposures and managing those
exposures by means of insurance
products. Also includes identifying,
measuring and managing all types of
risk exposures.
risk management function The
activities involved in identifying,
measuring and managing the
company’s exposure to all types of risk
to maintain an optimal risk–return
trade-off and therefore maximise
share value.
risk premium The additional return
offered by a more risky investment
relative to a safer one.
risk shifting When an organisation
pays another entity or person
to restore a loss of value due to
unforeseen circumstances.
risk spreading or diversification When
an organisation undertakes a number
of risk ventures at the same time
and the likelihood of all the ventures
simultaneously failing and reducing
organisational value is very low.
road show A tour of major investors
undertaken by a company and its
bankers several weeks before a
scheduled offering; the purpose is to
pitch the company’s business plan to
the prospective investors.Rule 144A offering A special type
of offering in the US market,
first approved in April 1990, that
allows issuing companies to waive
some disclosure requirements by
selling stock only to sophisticated
institutional investors, who may then
trade the shares among themselves.S
safety motive A motive for holding
cash and short-term investments in
order to protect the company against
being unable to satisfy unexpected
demands for cash. Sometimes called
the precautionary motive.
sale-leaseback arrangement One
company sells an asset to another for
cash, then leases the asset back from
its new owner.
scenario analysis A variation of
sensitivity analysis that provides for
calculating the decision variable,
such as net present value, when a
whole set of assumptions changes in a
particular way.seasoned equity offering (SEO) An
equity issue by a company that
already has ordinary shares trading in
the market.
secondary offerings The sale of
previously issued securities, which
are typically held in large blocks by
one or more investors, and raises no
additional funds for the initial issuer.
secondary investment A stake in a
PE or VC fund purchased from an
existing investor. Since this is the
only means of liquidating a PE or
VC investment before the end of the
fund’s term, an initial limited partner
will probably have to sell its stake for
a significant discount to its true value.
secondary-market transactions Trades
between investors that generate no
new cash flow for the company.
securitisation The repackaging of loans
and other traditional bank-based