Glossary
Capital allowances The equivalent to depreciation
that is allowed by the UK tax authorities in comput-
ing the taxable profit. (p. 118)
Capital asset pricing model A formula for deriving
the expected return from a risky asset/investment. It
takes account only of the systematic risk of the
asset/investment and has just one risk premium
measure. (p. 198)
Capital gearing SeeFinancial gearing. (p. 14)
Capital market line The straight line on a graph of
return against risk (as measured by standard devia-
tion) that runs from the risk-free rate tangentially to
the efficient frontier and beyond. (p. 198)
Capital markets Markets in which new finance is
raised by businesses and other organisations and in
which ‘second-hand’ securities are traded. (p. 184)
Capital rationing A situation that exists when there
are insufficient funds available to undertake all
beneficial investment opportunities faced by a par-
ticular business. (p. 126)
Cash flow statement A financial statement that sets
out the amount and sources of cash received by a
business, or other organisation, for a period, and the
cash payments made during that period. (p. 45)
Clientele effect A tendency for certain shareholders
to be attracted to the shares of a particular business
because of some feature of that business, for example
its dividend policy. (p. 306)
Coefficient of correlation A statistical measure of
the extent to which the value of one variable is linked
to that of another variable. (p. 190)
Combined Code A code of practice for businesses
listed on the London Stock Exchange that deals with
corporate governance matters. (p. 11)
Consumption Spending funds on current needs and
wants, as opposed to investment. (p. 30)
Convertible loan notes Loan notes that are convert-
ible into ordinary shares at some stage. (p. 240)
Corporate governance Systems for directing and
controlling a business. (p. 9)
Cost of capital The cost of servicing the various
sources of finance. It serves as the appropriate dis-
count rate for assessing investment decisions. (p. 117)Accounting rate of return An investment appraisal
technique that assesses the average accounting profit
as a percentage of the investment. Also known as
unadjusted rate of return and return on investment.
(p. 97)
Agency costs Costs incurred when using an agent to
act on behalf of the principal. In the business finance
context, they can be incurred by shareholders by
using managers to run the business on the share-
holders’ behalf. (p. 27)
Annuity A fixed payment, or receipt, arising on a
continual annual basis. (p. 85)
Arbitrage pricing model A formula for deriving
the expected return from a risky asset/investment.
It only takes account of the systematic risk of the
asset/investment, but has several risk premium
measures. (p. 205)
Balance sheet A statement that lists the assets of
a business, or other organisation, at some specified
point in time, together with the claims against those
assets. (p. 43)
Bankruptcy The colloquial name given to the forced
liquidation of a business. (p. 15)
Beta (b) A measure of the level of systematic risk
relating to a particular asset/investment. It relates
to assets and portfolios of assets that are not efficient
(in other words, they are exposed to specific risk).
(p. 199)
Bonds Long-term borrowings by a business. This is
the word used in the USA; in the UK such borrowings
tend to be referred to as ‘loan notes’. (p. 234)
Bonus issue An issue, usually of ordinary shares, to
existing shareholders without any payment being
involved. (p. 224)
Business angels Financiers (usually private indi-
viduals) who provide finance for small businesses
and, usually, commercial advice as well. (p. 442)
Business risk Risk that arises from the trading activi-
ties of the business. It excludes financial risk, which
arises from financial (capital) gearing. (p. 297)
Buy-in A divestment device where a group of indi-
viduals, not previously connected with a business,
buys the business from the owners. (p. 402)BUSF_Z04.qxd 11/19/08 10:34 Page 500