Financial Management - Key Terms

KEY TERMS IN FINANCIAL MANAGEMENT Abandonment option is an option to abandon/shut-down/terminate a project prior to its expected useful life. ABC analysis divides the inventory into three classes, A, B and C, in the order of their consumption value. ‘A’ class items are tightly controlled. ‘B’ class items are moderately controlled, and ‘C’ class items are controlled by adopting relaxed control procedures. The technique suggested for inventory control can equally be applicable to management of debtors balances by classifying the debtors balances into ‘A class’, ‘B class’ and ‘C class’. Absolute liquid assets include cash in hand, cash at bank and short-term or temporary investments. Absorption is the merger of one company into another company where the transferor company will go for liquidation and the transferee company continues to exist. Acceptable financing strategy is a trade-off between matching and conservative financing strategies. Accept-Reject decision is the evaluation of capital expenditure proposal to determine whether they meet the minimum acceptance criterion. Accounting rate of return is calculated as a percentage of the average annual profits after tax to average investment in the project, and the project with higher rate of return will be selected. It is also known as ‘return of investment’ or ‘return on capital employed’. Accounting ratios are used to describe significant relationships which exist between figures shown in the financial statements. A ratio is a quotient of two numbers and the relation is expressed between two accounting figures. Accrual concept in accounting system recognizes revenues and expenses as they are earned or incurred, without regard to the date of receipt or payment. Accrual method recognises revenue at the point of sale and expenses when they are incurred. Acid-test (quick) ratio is a measure of liquidity calculated dividing current assets minus inventory and prepaid expenses by current liabilities. Acquisition is the purchase of a company or a part of it so that the acquired company is completely absorbed by the acquiring company and thereby no longer exists as a business entity. Active risk management is in addition to actions in passive risk management strategy, the enterprise may also trade in the currencies in which it has underlying exposure. Activity ratios measure the speed with which various accounts/assets are converted into sales or cash. Adaptive market hypothesis theory assumes that investors tend to use trial and error mechanism while dealing with stock market. Once they gain experience and climb the learning curve, their investing skills and strategies will improve. Those who innovate and come up with new ways of making money survive. Adjusted present value a variant of DCF is value of the target company if it were entirely financed by equity plus the value of the impact of debt financing in terms of the tax benefits as well as bankruptcy cost.

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Adjusted present value is the total of present value of (1) cash flows after taxes, (2) interest tax shield and (3) any concessions/subsidies on interest costs. Ageing schedule enables analysts to identify slow paying debtors. In ageing schedule, the total debtors’ balances are classified according to their age of outstanding. The schedule helps in analysing the risk of default. Agency costs are costs borne by shareholders to prevent/minimise agency problems so as to contribute to maximize owner’s wealth. Agency problem is the likelihood that managers may place personal goals ahead of corporate goals. Agency theory models a situation in which a principal (shareholders) delegate decision making authority to an agent (managers) who receives a reward in return for performing some activity of principal. The shareholders can maximize their wealth by giving appropriate incentives to the managers and by proper monitoring of the managers. The management is considered to be an agent of shareholders, and if it does not act in the best interests of the shareholders, it leads to agency costs for the firm resulting in a fall of market price. Aggressive firm is a firm which seeks to maximize profit in foreign exchange markets. Aggressive policy implies minimum cash/cash equivalents, receivables and inventory. Aggressive strategy is an approach under which current assets are maintained just to meet the current liabilities without keeping cushion for variations in working capital needs. All India Financial Institutions(AIFIs) like IDBI, ICICI, IFCI, etc., provide foreign currency financial assistance to Indian projects for importing of plant and machinery, equipment, technology, etc., from abroad. Alpine convertibles are issued in dollars sold to Swiss investors through Swiss banking syndicates. The issue cost is very low. Altaman Z score model was developed in order to detect the financial health of individual units with a view to prevent the industrial sickness. It is a linear analysis used to develop with five variables. The model is also called as ‘multiple discriminant analysis’. The lower the Z score, there is a greater possibility of bankruptcy and vice versa. Amalgamation signifies the transfer of all or some part of the assets and liabilities of one or more existing business entities to another existing business entity or a new company. When two or more companies merged together, as a result, a new company comes into existence and the merged companies will go for liquidation is called ‘amalgamation’. American call option can be exercised at any time up to expiration. In American Option, the holder (if he desires) can exercise his right any time between purchase date and expiration date. American Depository Receipts (ADRs) – The issue of securities by an Indian company in U.S. through appointment of bank as depository is called ‘American Depository Receipts (ADRs)’. The physical shares remain in India with domestic depository who shall act as agent of overseas depository to get delivery of the underlying rupee denominated shares, which can be sold in the Indian stock markets. Amortisation is a gradual and systematic writing-off of an asset or repayment of liability over a period.

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Financial Management - Key Terms

Annuity – Annuity is a stream of equal annual cash flows. It is the amount per period of cash inflow or cash outflow for a specified period of time. For example, depositing Rs.700/- p.m. in bank recurring deposit for a period of 5 years to get Rs.50,000/- at the end of the 5th year. Application of fund is a result of an increase in an asset or decrease in a liability over the year. Appraisal value is the value acquired from an independent appraisal agency. Appreciation is an increase in the value of one currency in terms of another, resulting from an increase in market demand. Arbitrage is the act of simultaneous buying and selling of currencies in two different markets, with the aim of taking advantage of the temporary differential that exists between the two prices thereby resulting in equilibrium in exchange rates of different currencies. Arbitrage pricing model (APM) is a multifactor model, taking different betas for different factors effecting the variation in return. Arbitrage pricing theory has markets equilibrating across securities through arbitrage driving out mispricing. Arbitraguers profit from price differential existing in two markets by simultaneously operating in two different markets. Asian Development Bank (ADB) is set up with a view to improve the quality of life of people in Asia-Pacific region countries. Ask is the price/rate at which the market maker is willing to sell a currency or lend money. It is the higher of the two rates in case of a two way quote. It is also called as ‘offer’ rate. Asset allocation refers to the process of systematically placing of money into various classes of investments such as stock, bonds and cash equivalents. Asset management ratios measure how effectively the firm employs its resources, which involve comparison between the level of sales and investment in various accounts like inventories, debtors, fixed assets, etc. Asset securitization is a process of transformation of illiquid assets into security which may be traded later in the open market and it is the process of transforming the assets of lending institutions into negotiable instruments and their associated income streams. Asset stripping – Most of PSEs have valuable assets in the shape of plant and machinery, land and buildings, etc. It may be possible that the strategic partner may very well dispose these assets, make money, leaving the PSE as a sick enterprise. Assets turnover indicates the efficiency with which the firm uses all its assets to generate sales. Asymmetric information is a situation in which managers have more information about operations/prospects of a firm than its investors. Authorised Share Capital is the number of ordinary shares that a firm can raise without further shareholders’ approval. Average collection period is the average amount of time needed to collect accounts receivable.

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Financial Management - Key Terms

Average rate of return on an asset represents the average annual rate of return over a period of years during the investment. Backward integration is the creation of facilities of production of raw materials and components required for current production. Backwardation – If the spot price is greater than the futures price it is called ‘backwardation’. Bailout takeover is the takeover of a financially weak company by a profitable company. In bailout takeover, a sick company is bailed-out to implement rehabilitation as per the scheme approved by the financial institution. Balance Sheet approach – The working capital has its significance in two perspectives. These are gross working capital and net working capital. Balance sheet shows the financial position of the business as on a particular date. It represents the assets owned by business and the claims of the owners and creditors against the assets as on the date of statement. Balancing project – The balancing equipment is installed to remove the bottlenecks and to increase the capacity utilization of total plant. Bank/Clearing float is the delay between the deposit of a cheque by the payee and the actual availability of funds. Bank credit is a spontaneous source of finance whereby business firms are allowed by the suppliers of raw materials, services, etc., to defer the immediate payment to a definite future period. Bank guarantee is a form of facility extended by the bank, on behalf of its customer, in favour of third parties who will be the beneficiaries of the guarantees. The banker’s liability arises only if his customer fails to pay the beneficiary of the guarantee. The bank guarantee limits are known as ‘non-borrowing limits’ or ‘non-fund limits’. The bank guarantee provided by the importer obviates the need to make a thorough check on creditworthiness of the importer. Bank overdraft is a short-term borrowing facility made available by the bank to the companies in case of urgent need of funds; with a right to call them back at short-notice. Banker’s acceptances are short-term, low-risk marketable securities arising from bank guarantees of business transactions. Bankers acceptance is a draft against a bank specified amount at a future date. Bankruptcy costs imply high probability of default. Base-period earn-out is the payment to shareholders of target firm in shares related to increase in firm’s earnings in future years over the base period earnings. Basis – The difference between spot price and future price is known as ‘basis’. The longer the delivery dates due, the more will be the basis. On expiry, the basis is zero and futures price equals to spot price. Baumol Model is a model that provides for cost-efficient transactional balances and assumes that the demand for cash can be predicted with certainty and determines the optimal conversion size/lot.

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Financial Management - Key Terms

Baumol’s EOQ Model suggests that cash is to be managed in the same manner like any other item of inventory and finds an optimum cash balance by combining the carrying costs and transaction costs to the minimum. The carrying costs refer to cost of holding cash, i.e., interest foregone on marketable securities. The transaction costs refer to cost involved in getting the marketable securities converted into cash and vice versa. Bear market is said to be in bearish condition if the stock index declines over 20 per cent. A bear market is a weak or falling market characterized by the dominance of sellers. Benchmark is a general rule of thumb specifying appropriate levels for financial and cost ratios. Benefit cost ratio (BCR) is ascertained by taking the ratio of estimated benefits to estimated cost of the project. If the ratio is greater than 1 it is positive and if less than 1 it is negative. Beta coefficient – The slope of the line is called ‘beta coefficient’. Greater the beta coefficient value, greater the slope of characteristic line and greater the systematic risk of an individual security. Beta factor is the measure of volatility of systematic risk of an investment in the portfolio. If a beta is more than 1, it means stock is more sensitive than the average investment and vice versa. Beta measures the risk (volatility) of an individual asset relative to market portfolio. Bid is the price/rate at which the market maker is willing to buy a currency or borrow money. Bilateral credits are Government protocol credits or the credits which are given by friendly foreign countries at concessional rates of interest, to finance the imports from the donor country. Under the bilateral credit, the procurement source is tied to goods and services of the donor country. Bills acceptance – Under this finance arrangement, a company draws a bill on the bank. The bank accepts the bill thereby promising to payout the amount of the bill at a specified future date. The bill bearing the bank’s name can be sold in the money market at a discount than the amount for which the bill is drawn. Bills discounting is a source of working capital finance in which bills arising out of trade transactions are sold to a financial intermediary at a discount. The banker will generally earmark the discounting bill limit. Bills payable – When an instrument is given, notably negotiable instrument, in acknowledgement of the debt the same appears in the balance sheet of the buyer as ‘bills payable’ or ‘notes payable’. Bills rediscounting – Banks raise funds through issue of Usance Promissory Notes (UPNs) in convenient lots and maturities on the strength of genuine trade bills discounted by banks’ branches. Banks may invest by way of rediscounting trade bills of other eligible banks and institutions against a UPN issued by them. Bird-in-hand argument is the belief that current dividend payments reduce uncertainty and result in higher value of shares of a firm. Black-Scholes option pricing model is a precise model to arrive at the equilibrium value of an option.

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Financial Management - Key Terms

Block of assets are assets which fall in the same class and in respect of which the same depreciation rate is applicable irrespective of their nature. Bond yield is the reward for investing in a bond which includes interest payment as well as premium on redemption. Bonus shares involve payment to existing owners of dividend in the form of shares. Book building – In book building process, the issuing company will ascertain the demand for the securities and the price at which such securities and ultimately determines the quantum of shares to be issued and the issue price. The issue price is not fixed in advance. Book value is the value at which assets are shown in balance sheet. Book value is the value of owner’s equity determined by dividing net worth by the equity shares outstanding. Book value indicates the net worth per equity share and it reflects the past earnings and distribution policy of the company. Book value per share is the amount per share on the sale of assets of the company at their exact book (accounting) value minus all liabilities including preference shares. Book value weights use accounting (book) values to measure the proportion of each type of capital to calculate the weighted average cost of capital. Bought-out deal – In a bought-out deal, the issuing company firstly allots shares in full or in lots to a sponsor at a negotiated price and will have immediate access to the funds. Later the sponsor will issue those shares at a premium to the public. Breadth of market is a characteristic of a ready market determined by the number of participants (buyers) in the market. Break-even chart is a graphic relationship between volume, costs and profits. Break-even point is the sales volume at which revenue equals cost (i.e., no profit no loss). Bridge loans are raised from banks and financial institutions when the source and timing of the funds to be raised is known with certainty, to fill the time gap in accessing the funds to speed up the project implementation. Brown field project is a project implemented in the precincts of a working plant/ working facility. It can also be modernization or expansion project taken up within the same precincts. Build, operate and transfer (B.O.T.) scheme –Under this scheme, the entrepreneur builds the project from his own resources and operates it for a certain period and then transfers the project to the Government. Build, own and operate (B.O.O.) scheme – Under this scheme, the entrepreneur builds the project from his own resources and operates the project after its commercial launching. Bull market is a raising market with abundance of buyers and relatively few sellers. Business process re-engineering (BPR) is a continuous process of rethinking, reassessment, redesign, evaluation of each element of business process to achieve improvements in performance measures. The BPR is to improve competitiveness, core competence, efficiency, profitability, strategic positioning, customer satisfaction, etc.

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Financial Management - Key Terms

Business risk is determined by the type of its projects, competitive conditions, market share, growth rate of business and industry, stage of maturity, etc., of a company. Business Risk is the risk to the firm of being unable to cover fixed operating expenses. It arises due to higher amount of fixed overheads in cost structure. It relates to volatility of revenues and profits of a particular company due to its market conditions, product mix, input availability, competitive conditions, labour supply, etc. Business taxation – The tax payments represents a cash outflow from the business and these cashflows are a critical part of the financial planning and decision making in a business firm. The taxation implications are dominant influences on the final investment decisions also. Buy-outs imply transfer of management control. Calendar spread entails selling options with a near-month expiry, against the purchase of options for the same underlying and at the same strike price in the far month. Call money refers to the amount received or delivered by the participants in the call money market and where the funds are returnable next day. The call money transactions are also referred to as ‘overnight funds’. Call option entitles the holder the right but not the obligation to buy securities. Call option in the case of a debenture gives liberty to the issuer of the debenture to payback the amount earlier to the redemption date at a predetermined price (strike price) within a specified period. Call premium is the amount by which a bonds’ call price exceeds the par value. Call price is the stated price at which a bond may be repurchased by use of a call feature prior to maturity. Call provision is a provision/feature that gives the issuers the opportunity to repurchase bonds at a stated price prior to maturity. Call rate – The interbank market enables banks to lend and borrow funds overnight for their daily requirements and the interest for such borrowal or lending is called ‘call rate’. Callable bond is a bond which the issuer has the right to call in and payoff at price stipulated in the bond contract. Capital account convertibility means removal of exchange control restrictions on capital flows. Full capital account convertibility will integrate the national economy with the global economy. Capital allocation line shows the reward to variability ratio in terms of additional beta. Capital asset pricing model (CAPM) is an equilibrium model of the trade-off between expected portfolio return and unavoidable (systematic) risk; the basic theory that links together risk and return of all assets. Capital asset pricing model describes the relationship between the required return or cost of equity capital and the non-diversifiable risk of a firm measured by beta coefficient, b. Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the goal of shareholders (owners) wealth maximisation. Capital budgeting process includes four distinct but interrelated steps used to evaluate and select long-term proposals: proposal generation, evaluation, selection and follow-up. Capital budgeting relates to the selection of an asset whose benefits would be available over the project’s life.

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Financial Management - Key Terms

Capital cost is the cost on the use of additional capital to support credit sales which alternatively could have been employed elsewhere. Capital employed includes share capital, reserves and surplus, secured loans, unsecured loans less investments made outside business, preliminary expenses, profit and loss account debit balance and capital work-in-progress. Capital expenditure is an outlay of funds that is expected to produce benefits over a period of time exceeding one year. Capital investment process involves search for investment opportunities, screening and evaluation of alternatives and selection of right alternative for implementation. Capital market line depicts the risk-return relationship for efficient portfolio. Capital market refers to the market for long-term securities such as corporate stocks and bonds, for financing long-term assets. Capital market/securities market is a financial relationship created by a number of institutions and arrangements that allows suppliers and demanders of long-term funds with maturities exceeding one year to make transactions. Capital rationing implies the choice of investment proposals under financial constraints of capital expenditure budget. Capital rationing is the financial situation in which a firm has only fixed amount to allocate among competing capital expenditures. Capital structure is the proportion of debt and preference and equity shares on a firm’s balance sheet. CAPM Method – Cost of equity capital consists of risk-free return plus premium to compensate for business and financial risks. Carrying costs are the variable costs per unit of holding an item in inventory for a specified time period. Cash assets include holding of funds in most liquid form like cash in hand, cash at bank, marketable securities, etc. Cash assets management – The basic objective of cash assets management is to optimize liquidity and profitability. Cash is a non-earning asset. Idle and temporary cash surplus to be suitably invested in liquid, short-term and long-term investments as per the firm’s policy with a view to increase its profitability. Cash Break-even point is total cash fixed cost divided by contribution margin per unit. Cash budget incorporates the cash inflow and cash outflow, both revenue and capital items, to ascertain the cashflow position and to meet the situations of cash deficit. Cash budget is a statement of the inflows and outflows of cash that is used to estimate its short-term requirements. Cash Budget is prepared for the forthcoming period as a planning exercise. It starts with the opening balance of cash in hand and cash at bank. It incorporates all expected cash receipts and estimated payments and ascertains the excess or shortage of the cash for the period. Cash comprises cash in hand and demand deposit with banks. Cash is the ready currency to which all liquid assets can be reduced.

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Financial Management - Key Terms

Cash cost working capital – In estimation of working capital under cash cost basis, depreciation is excluded from cost of goods sold; depreciation and profit margin are excluded from selling price for ascertaining the investment in debtors balance. Cash credit – The banker will allow certain amount of credit facility to its customer on continuous basis and the customer is not allowed to exceed the limit sanctioned by the bank. Cash cycle is the amount of time cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product; calculated as average age of inventory plus average collection period minus average accounts payable period. Cash deficit can result in making of suboptimal investment decisions and suboptimal financing decisions. Cash disbursement implies all cash outflows during a given financial period. Cash discount implies a percentage deduction from the purchase price if the buyer pays within a specified time that is shorter than the credit period. Cash discount is a discount or reduction in debt allowed by creditors to their debtors to encourage them to pay their dues before the expiry of credit period. Cash discount is the incentive to customer to make early payment of sum due. Cash discount period is the duration of the period during which discount can be availed of. Cash earnings per share are calculated by dividing the net profit before depreciation with number of equity shares. Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, e.g., commercial paper, treasury bills. Cash flow analysis evaluates the risk of financial distress. Cash flow statement (CFS) provides a summary of operating, investment and financing cashflows and reconciles them with changes in its cash and cash-equivalents (marketable securities) during the period. Cash profit = Net profit + Depreciation. Cash proportion ratio will assist in the cash management by fixing the level of cash balance in proportion to the level of current assets. Cash receipts imply all cash inflows in a given financial period. Cash substitution hypothesis enables conservation of cash. Cash turnover – In determining the amount of cash that the company may need to carry cash is to examine the cash balance in relation to sales of the said period. Cash turnover is the number of times cash is used during the year; calculated by dividing number of days in a year by the cash cycle. Cashflow method recognises revenues and expenses only with respect to actual inflows and outflows of cash. Cashflow statement provides information about the cash receipts and cash payments of an enterprise for a given period by providing the information about changes in cash and cash equivalents.

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Financial Management - Key Terms

Cashflows means the movement of cash into and out of the organization and the difference is either net cash inflow or net cash outflow. CAT schedule stands for ‘commuted activity target schedule’ used for assessing the progress of executing agencies. It is detailed and developed in a squared network form. Centralized treasury management is set up in the head office of Treasury Department which will look after this management of funds of multi-location centres of the organization. Certainty equivalent approach – Under certainty-equivalent approach, the expected cashflows of a project are converted into equivalent risk-free amounts. The smaller certainty- equivalent will be used in case of expected cashflows and larger certainty-equivalent is for cash outflow. Certainty equivalents – Certainty equivalents are risk-adjusted factors that represent the per cent of estimated cash inflow that investors would be satisfied to receive for certain rather than the cash inflows that are possible/uncertain for each year. Certificate of deposit is a marketable receipt of funds deposited in a bank for a fixed period at a specified rate of interest. Certificate of Deposits are issued by commercial banks and cooperative banks excluding land development banks, for a period of not less than 3 months and up to a period of not more than one year. CDs are in the form of usance promissory notes issued at discount and institutions against a UPN issued by them. Changes in working capital position – The excess funds generated over funds outgo from non-current assets and non-current liabilities will lead to increase or decrease in working capital and is presented in a statement form. Characteristic line is the line of best fit that represents the returns on assets and their risk level. Chartism – The chart patterns are used to predict the market movements and the basic concept underlying the chart analysis are: (a) persistence of trends, (b) relationship between volume and trend, and (c) resistance and support levels. Cheque encashment analysis is a way to play the float by depositing a certain proportion of a payroll payment in the firm’s account on several successive days following the actual issue of cheques. Cheque-kiting is a method of consciously anticipating the resulting float or delay associated with the payment process using it to keep funds in an interest-earning form for as long as possible. Circuit breaker is a device that halts trading in a stock if the price changes by a predetermined percentage on a given day. The stock exchanges have 2, 5, 10 and 20 per cent circuit breakers on certain stocks. Circuit filters are tightened to control the movement of scrip in times of high volatile markets to see that the loss is minimal to the investors. For example, if the share price moves up or down beyond specified limits in terms of percentage, say 2 per cent circuit filter, trading comes to a halt on that security for the specified duration, to ensure the market to cool down. The circuit filter system is also extended to the stock market indices, viz., Sensex and Nifty. Clientele effect argues that different group of investors’ desire different levels of dividend payment.

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Financial Management - Key Terms

Coefficient of variation is a measure of relative dispersion used in comparing the risk of assets with differing expected returns. Collateral (secondary) involves the items used by a borrower to back up a loan; any asset against which a lender has a legal claim if the borrower defaults on some provisions of the loan agreement. Collection cost is the administrative cost incurred in collecting receivables. Collection expenses are the expenses which a firm has to incur for some routine costs like sending reminders, telephone expenses, expenses incurred for personal visits to customers’ places, commission and fees payable to collection agencies, legal expenses, etc. Collection float refers to the time between the payment made by the debtors or customers and the time when funds available for use in the company’s bank account. Collection policy involves procedures for collecting accounts receivables when they are due. Commercial paper is a debt instrument for short-term borrowing issued by the corporate borrowers having good credit rating, as an alternate for bank borrowing for working capital finance. Commercial paper is a form of financing consisting of short-term unsecured promissory notes issued by a firm with high credit rating. Commercial papers are a short- term, unsecured promissory note issued by a firm that has credit rating/standing. Commodity exchange is like a stock exchange. It does not buy or sell anything, but it only provides a platform to members to buy and sell. It deals with agricultural commodities, metals, etc. Commodity futures is a contractual agreement between two parties to buy or sell a specified quantity and quality of commodity at a certain time in the future date at a certain price agreed upon at the time of entering into the contract on commodity futures exchange. Common size statement expresses assets and liabilities as per cent of total assets and expenses and profits as per cent of sales. Common time horizon approach makes a comparison between projects that extends over multiples of the lives of each. Common-size income statement – In this, sales figure is taken as ‘100’ and all figures of assets and liabilities, capital and reserves are expressed as a proportion to the total, i.e., 100. Comparative balance sheet are Balance sheets as on two or more different dates which are used for comparing the assets, liabilities and net worth of the company. Comparative income statement shows the absolute figures for two or more periods and absolute change from one period to another. Compensative motive is a motive for holding cash/near-cash to compensate banks for providing certain services or loans. Competitive bid is a public announcement by a person other than the acquirer for the acquisition of shares of the same target company. Compound interest is the interest earned on a given deposit/principal that has become a part of the principal at end of a specified period. Compound/future interest factor for an annuity is the multiplier used to calculate the future/compound value of an annuity at a specified rate over a given period of time.

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Financial Management - Key Terms

Compounding rate is the rate applied in the reverse process of discriminating the present value of future cashflows. Concentration banking is a collection pro9cedure in which payments are made to regionally dispersed collection centres, and then deposited in local banks for quick clearing; reduces float by shortening the postal and bank float. Conditional loan is a quasi-equity instrument without any pre-determined repayment schedule or interest rare; the charge is a royalty on sales. Conflicting ranking is conflict in the ranking of a given project by NPV or IRR resulting from differences in magnitude or timing of cashflows. Conglomerate merger is a merger in which firms engaged in different unrelated activities combine together. Conglomerate merger is a type of combination which a firm established in one industry combines with another firm in another unrelated industry. Conservative dividend policy – Closely held companies generally follow a conservative dividend policy with a view that successful investment opportunities are open to the firm and there is no point in paying dividends and raising additional capital. Conservative financing approach is a strategy by which the firm finances all funds requirement, with long-term funds for emergencies or unexpected outflows. Conservative strategy suggests not to take any risk in working capital management and to carry a high level of current assets in relation to sales. Consortium lending – When the financial needs of a single unit is more for a single bank to cater to the needs, then more than one bank come together to finance the unit jointly spreading the risk as well as sharing the responsibilities of monitoring and finance. Constant dividend payout – The firm maintains stability of dividends and always paying a fixed percentage of the net earnings every year. This method is known as ‘constant dividend payout ratio method’. Under this method, if earnings vary, the amount of dividends will also vary from year to year. Constant dividend per share policy is a policy of paying a certain fixed amount per share as dividend. Constant dividend rate – Under this, the dividend rate is kept constant even though earnings are fluctuating by maintaining a separate provision called ‘dividend equalization reserve’. The firm will resort to increase or cut in dividend rate only when there is a tendency of wide fluctuations in earnings. Constant growth model assumes that dividend will grow at a constant rate that is less than the required rate. Constant-target payout ratio is a policy to pay a constant percentage of net earnings as dividend to shareholders in each dividend period. Consumer credit is generally offered to the end-consumer. It is provided through instalment purchase or hire purchase schemes for the consumer durables, automobiles, machinery and equipment, etc. Contango – If the futures price is greater than the spot price it is called ‘contango’. Contribution margin is the excess of unit sale price over unit variable cost.

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Financial Management - Key Terms

Controllability – Once the uncertainty is recognizable in advance then steps could be taken in time to control the risk. Conventional cash flow pattern is an initial outflow followed by only a series of inflows. Conventional investment projects are projects which cash outflows are confined to the initial period. Conventional method is a method of valuation of venture capital undertakings which takes into account only the starting time of investment and the exit time. Conversion feature (convertibility) is a feature that allows preference shareholders to change each share in a stated number of ordinary shares. Conversion premium indicates the amount by which the current share price at the time of issue of convertible instrument would have to raise to reach the conversion price at the time of conversion. Conversion price is the per share price that is effectively paid for the shares as the result of exchange of a convertible debenture. Conversion ratio is the ratio at which a convertible debenture can be exchanged for share. Conversion ratio means the number of equity shares for which each debenture or preference share is being converted. Conversion time is the period from the date of allotment after which the option can be exercised. Conversion value (CV) is the value of a convertible debenture measured in terms of the market price of shares into which it can be converted. Convertible debentures – A company can issue convertible debentures with an option to convert a portion or full amount of the face value of debentures into equity shares as per the terms specified in the issue. Any non-convertible portion will be repaid at the end of specified period. Convertible debentures give the holders the right (option) to change them into a stated number of shares. Convertible instruments – The convertible preference shares or convertible debentures exchangeable into ordinary shares either at the option of the holder or compulsory conversion under specified terms and conditions. Convertible preference share is convertible into equity shares at a future specified date at a pre-determined conversion rate. Convertible price is the price at which debentures can be converted into equity shares. The conversion price is always fixed at a figure above the market price of shares at the time of issuing convertible instrument. Core current assets are those required by the firm to ensure the continuity of operations which represents the minimum levels of various items of current assets. This minimum level of current assets is to be financed by long-term sources and any fluctuations over the minimum level of current assets will be financed by the short-term financing. Core portfolio refers to allocating assets primarily into stocks.

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Financial Management - Key Terms

Core-satellite approach – The asset allocation policy of mutual funds, pension funds, and insurance companies includes allocating assets to stocks, bonds, commodities, derivatives and non-directional hedge funds is called core-satellite approach. The core portfolio provides market or beta exposure and satellite portfolio strives to generate alpha returns-excess returns attributable to the manger’s skill. Corporate actions are the events which affect the rights, obligations and/or interests of the beneficial owners of the securities held by a depository. The examples of corporate action are like payment of interest, dividend; issue of bonus shares, rights shares, preferential issues, merger, redemption; calling of call money due; liquidation, etc. Corporate financing means identification of funds requirement of a firm and raising of funds from various sources to meet the fund requirements of the firm. Corporate governance is the system by which business corporations are directed and controlled. It is a process to ensure that a company is managed to suit the best interests of all stakeholders. Corporate governance rating indicates the relative level to which a corporate entity accepts and follows the codes and guidelines of corporate governance practices. Corporate governance refers to the distribution of rights and responsibilities among different participants in a corporate entity such as shareholders, management, and lenders/ creditors. Corporate restructuring implies activities related to expansion/contraction of a firm’s operations or changes in its assets or financial or ownership structure. Corporate restructuring is a process by which a firm does an analysis of itself at a point of time and alters what it owes and owns; refocus itself to specific tasks of performance improvements by radically altering the firm’s capital structure, asset mix and organization so as to enhance the value of the firm. Corporate taxation causes change in cashflows and it is important to consider the implication of tax provisions on project evaluation process, before final investment decision is made. The depreciation provision and interest charge on loan financing a project are deductible expenditure in computation of tax which reduces the cash outflows. Corporatization intends to make a stock exchange as a corporate entity limited by shares and converting it from a ‘non-profit’ member owned organization to a ‘for-profit’ shareholders’ organization. Correlation coefficient is a measure of the degree of correlation between two series. Correlation is a statistical measure of the relationship between series of numbers representing data of any kind. Correspondent banking is a system of interbank relationships in which a bank sells services to other financial institutions. Cost and time overruns is a common problem in execution of the projects that the actual cost on the project would exceed than the estimated cost. Similarly, the project would not be completed within the time schedule for various reasons.

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Financial Management - Key Terms

Cost benefit analysis (CBA) is a sophisticated technique used in evaluation of long-term capital projects by conducting the monetary assessment of total costs and revenues (benefits) of the project, taking into consideration the social costs which are ignored in normal capital budgeting evaluation. It incorporates the environmental problems, opportunity costs and transfer prices into the capital budgeting process. Cost of capital is the rate of return that a firm must earn on its project/investments to maintain its market value and attract funds. Cost of carry model explains the dynamics of pricing that constitute the estimation of the fair value of futures. Cost of credit – The extension of credit to customers involves the carrying costs, defaulting costs, administration costs. Costs of denying credit leads to loss of sales. Cost of credit is the implicit cost of not availing cash discount. Cost of debt is the after tax cost of long-term funds through borrowing. Cost of equity capital is the rate at which investors discount the expected dividends of the firm to determine its share value. Cost of equity is the minimum rate of return that a company must earn on the equity share capital financed portion of a project so that market prices of the shares remain unchanged. Cost of preference share capital is ascertained by dividing the preference dividend with net proceeds from issue of preference shares after deducting the floating costs. The cost of preference capital can also be ascertained by dividing the preference dividend with average amount of redeemable and sale value of preference shares. Cost of Preference share capital is the annual preference share dividend divided by the net proceeds from the sale of preference shares. Cost of project is the aggregate of costs estimated to be incurred on various heads for bring the project into existence like land and site development, factory building, plant and machinery, miscellaneous fixed assets, preliminary and preoperative expenses, technical know-how fees, contingencies and escalation, margin money for working capital. Cost of retained earnings is the same as the cost of an equivalent fully subscribed issue of additional shares, which is measured by the cost of equity capital. Cost-benefit analysis – In public sector enterprises investment decision is appraised by taking into consideration discounted value of social costs and social benefits attributes to the project. If the discounted social benefits exceed discounted social costs, then the project would be sanctioned. Counter party risk is the possibility of default by any one party to the transaction. Counter trade is an important source of finance in international trade, in which the barter deals takes place instead of payments in foreign exchange. Country risk refers to the risk attached to the foreign funding that may arise due to unwillingness or inability on that part of the borrower to repay the debt. Coupon rate is the specified rate available on a security. Coupon stripping – In coupon stripping mechanism, the principal part and interest part of the bond are separated and sold to the investors. The principal part is structured as zero coupon bonds and interest part can be structured like any other debt instrument.

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Financial Management - Key Terms

Covariance with unexpected inflation is desirable from the standpoint of the investor. Coverage ratio measures the size of interest payments relative to the EBIT and the adequacy of EBIT to meet payment obligations. Coverage ratios measure the firm’s ability to pay certain fixed charges. Covered option – An investor who writes a call option, against the stock held in his portfolio, is called ‘covered option’. Credit analysis involves obtaining credit information and evaluation of credit applicants. Credit derivatives are invented to hedge the risk of banks and financial institutions. Credit derivatives allow users to isolate, price and trade firm specific risk into its component parts and transferring each risk to those best suited or more interested in managing it. Credit enhancements are the various means that attempt to buffer investors against losses on the asset collaterising their investment. Credit insurance policy covers the payment of risk arising out of countries for the goods and services exported from India. Credit period is the period for which trade credit is made available to the company its suppliers. Credit period is the time for which trade credit is extended to customer in the case of credit sales. Credit policy – A firm is required to establish its credit policy for efficient management of receivables. A credit policy specifies the credit term, acceptable credit risk, discount policy, assessment of creditworthiness, and action against slow-players. Credit policy is the determination of credit standards and credit analysis. Credit rating indicates the creditworthiness of the borrower. The companies raising funds from the capital market in the form of long-term debt, debentures, bonds, fixed deposits, commercial paper, etc., will obtain credit rating which indicates the quality of debt instruments, and the risk involved in timely repayment of principal and interest. Credit rating is a symbolic indicator of the relative ability of the issuer of the debt instruments to meet obligations when due. Credit risk means that there is a possibility that the debt will go bad. Credit standards are basic criteria/minimum requirement for extending credit to a customer. Credit term is the time period allowed to the customer in payment against credit sales. Credit terms specify the repayment terms required of credit customers/receivables. Credit wrapping is a technique by which bonds are issued by a company with poor credit rating but an institution with strong credit rating underwrites a proportion of the amount payable in the event of default at the time of redemption. Creditors payment period indicates the average time taken by a firm to pay for goods and services purchased. Creditworthiness – The basic consideration in granting credit is the evaluation of risk that the debt will go bad. The information about the status and soundness of the party is assessed. It is termed as ‘creditworthiness’ of the customer. Cross currency rate – When the rupee-dollar rate and dollar-pound rate are given, we can ascertain the rupee-pound rate. It is called cross currency rate.

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Financial Management - Key Terms

Cross rate is the rate of exchange of two currencies on the basis of exchange quotes of other pairs of currencies. Cross sectional comparison means company’s financial and cost ratios are compared with ratios of other companies or with industry averages for the same period. Cum-rights – When rights issue is announced, all existing shareholders have the right to subscribe for new shares and so there are rights attached to the existing shares which is described as cum-rights (with rights attached). Cumulative (dividend) preference shares are preference shares for which all unpaid dividends in arrears must be paid along with the current dividend prior to the payment of dividends to ordinary shareholders. Currency diversification – By having a portfolio containing diversified mix of currencies, one can protect from exchange rate fluctuations. Currency futures contract is an arrangement to buy or sell a standardized quantity of specific currency, interlocking both buyer and seller into a particular rate. Currency option is an option that gives the holder (buyer) the right, but not the obligation, to exchange a specified amount of one currency into another specified currency on or before a specified date at a specified rate of exchange. The buyer (holder) of the option pays a ‘premium’ to its writer (seller). Currency option provides its holder the right but not the obligation to buy/sell a specified amount of foreign currency at a specified rate up to a specified period. Currency swap is a legal agreement between two parties to exchange the principal and interest obligations, or receipts, in different currencies. A currency swap may also take place in the form of fixed or floating rate payments in one currency for fixed or floating payments in a second currency. Currency swaps involve exchange of debt obligation denominated in different currencies. Current assets are those assets which are convertible into cash within a period of one year and are required to meet the day to day operations of the business. Current assets policy is the relationship between current assets and sales volume. Current liabilities are liabilities and provisions that are payable within a year. For example, creditors, bills payable. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year. Current ratio is a measure of liquidity calculated dividing the current assets by the current liabilities. Custodian in a financial market is the caretaker of securities and documents and in return he gets some benefit for his services as custodial charges. A custodian receives securities from the broker or issuing company and keeps them in safe custody as a caretaker on behalf of its customers. Cyclical company – The cyclical company’s sales and earnings will be heavily influenced by aggregate business activity. The cyclical company will do well during economic expansion and very poorly during economic contraction. Cyclical stock will experience changes in rates of return that are greater than changes in overall market rates of return.

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Financial Management - Key Terms

D/P (dividend payout) ratio indicates the percentage earnings distributed to shareholders in cash, calculated dividing the cash dividend per share by its earnings per share. Debenture is a kind document acknowledging the money borrowed containing the terms and conditions of the loan, payment of interest, redemption of the loan, the security offered by the company. Debenture includes debenture stock, bonds acknowledging of debt. Debenture trustee – When a company makes an issue of debentures, a debenture trustee is appointed to protect the interests of the debentureholders. The powers and duties of the trustees will be set out in the trust deed. In case of secured debentures, the trustees will have a legal mortgage on the company’s property. Debenture/bond is a debt instrument indicating that a company has borrowed certain sum of money and promises to repay it in future under clearly defined terms. Debt – The long-term liabilities that are raised for business like debentures, bonds, term loans, etc. Preference share capital is excluded from debt. Debt capacity relates to how much debt can be comfortably serviced. Debt securities mean non-convertible securities, including bonds/debentures and other securities of a body corporate/any statutory body, which create/acknowledge indebtedness. Debt service capacity is the ability of a firm to make the contractual payments required on a scheduled basis over the life of the debt. Debt Service Coverage Ratio (DSCR) indicates the ability of the borrower to service the loan in regard to timely payment of interest and repayment of loan instalment. Debt-equity ratio analysis – The debt-equity ratio is a commonly used determinant of capital structure. There is an optimal capital structure where the marginal tax benefit is equal to the marginal cost of anticipated financial distress. Debt-equity ratio measures the ratio of long-term or total debt to shareholders equity. Debtors’ collection period indicates the time taken to collect amounts from debtors. Debtors’ turnover indicates the amount of resources tied up in debtors and it indicates the efficiency of the firm in converting debtors into cash. Decision making is a process of thinking which results in the choice among alternative courses of action. Decision model – Any method for making a choice sometimes requiring elaborate quantitative procedures. Decision tree is a pictorial representation in tree form which indicates the magnitude, probability and inter-relationships of all possible outcomes. Decision tree technique can be used in analyzing the cost-benefit in granting credit to a customer. The payment of debt or turning out to be bad debt are the future uncertain events for which probabilities are assigned, based on the chances of outcome estimated. The decision trees are constructed from left to right as a branching diagram with probabilities of different activities and the payoffs of the different decisions are ascertained. Deep discount bonds are issued at a deep discount price with a very long maturity period say 25 years, but the investors are allowed to withdraw from the scheme periodically after say 5 years by returning the certificate.

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Financial Management - Key Terms

Default costs are the over dues that cannot be recovered. Default risk arises due to default in meeting the financial obligations as and when due for payment. Default risk is the uncertainty of expected return attributable to possible change in financial capacity of issuer of security to make future payments. Defensive company – In defensive companies, the future earnings are likely to withstand an economic downturn. Defensive firm is a firm which aims to minimize potential losses resulting from changed exchange rates. Defensive interval is a measure of liquid assets against projected daily cash requirement. Defensive interval ratio is the ratio between quick assets and projected daily cash requirement. Defensive stock is a stock with low systematic risk would be considered as defensive stock. Deferred annuity is an annuity where the first payment is delayed beyond one year. Deferred shares – In case of deferred shares, there will be deferment of the dividend payment against shares held by promoters or directors till the business undertaken by the company leads to success. Degree of financial leverage measures the responsiveness of EPS to the changes in EBIT. Degree of operating leverage measures the responsiveness of EBIT to change in levels of output and indicates the response in profits with alternation of output sales. Where a change of 1% in sales produces a more than 1% change in EBIT, there is a presence of operating leverage. Degree of total leverage measures the sensitivity of EPS to change in quantity produced and sold. Delinquency cost is cost arising out of failure of customers to pay on due date. Demat trading – In a demat trading, the depositories maintain and transfer ownership records in electronic form for wide range of corporate securities and money market instruments, in dematerialized form. Dematerialization is the conversion of physical certificates into dematerialized holdings at the request of the investor. Demerger (divestiture) is a form of corporate restructuring which involves sale of only some assets of the firm. Demerger is the transfer by a one company or more of it undertakings to another company. In demerger, for strategic reasons, a conglomerate splits into two or more independent separate bodies and assets are transferred to such bodies. Demutualization means segregating the ownership from management in a stock exchange to bring in transparency and prevent conflict of interest by separating ownership, trading and management of a stock exchange. Dependent cash flows are cash flows in a period which depend upon the cash flows in the preceding periods.

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Financial Management - Key Terms

Deposit float is the funds despatched by a payer that are not yet in a form that can be spent/used by the payee. Depository action – The depository system enables an investor to convert his shareholdings in denial shares by opening an account with a depository participant which is similar to the opening of a bank account. Depository is an organization that holds the custody of securities in the form of electronic book entries and carries out transactions by book entry, the way a bank transfers funds without handling money. Depository participant (DP) is an agent of Depository and functions as the interacting medium between the Depository and the investor. A DP is responsible for maintaining the investor’s securities account with the Depository and handles the account in accordance with the investor’s written instructions. Depository receipts are a type of negotiable financial security that can be traded on a local stock exchange, representing ownership of shares in companies of other countries. Depreciation allowance is the measure of wearing out, consumption or other loss of value of a fixed asset. It may also arise from use of asset, affluxion of time, obsolescence through technology and market changes, etc. Depreciation will also serve as a tax shield. Depreciation is a non-cash expense that affects the taxes paid in cash. Depth of market is a characteristic of a ready market, determined by its ability to absorb the purchase/sale of a large amount of a particular security. Derivative security is a security that derives its value from an underlying asset that is often another security for example, equity shares. Derivatives are instruments which include (a) security derived from a debt instrument, share, loan, risk instrument or contract for differences or any other form of security and (b) a contract that derives its value from the price/index of prices of underlying securities. Derivatives are the instruments that derive their value from some underlying assets like equity, commodity, currency, interest rate, gold, etc., and the derivatives will not have intrinsic value of its own. The changes in the values of underlying assets will have effect on values of derivatives based on them. Detailed project report contains the details about the plan of action, details about technical, financial, marketing, management and social aspects. The detailed project report will be submitted to the banks and financial institutions for financial support both for long-term assistance and working capital requirements. Development financial institutions like IDBI, ICICI, IFCI, SCICI, IRBI SIDBI, State Finance Corporations, and State Industrial Development Corporations cater to the needs of business sector by term lending with different schemes of finance and contributing to the growth of the national economy through industrial development. Differential inflation is a situation where costs and revenues change at differing rates of inflation for various items and revenue. Dilution of control/financial interest occurs when a new share issue results in each existing shareholder having a claim in a smaller part of the firm’s earnings than before.

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Financial Management - Key Terms

Direct bankruptcy costs are legal and administrative costs associated with bankruptcy proceedings and dismantling/removal costs of undersold assets. Direct lease is a lease under which a lessor owns/acquires the assets that are leased to a given lessee. Direct method is a method under which cash receipts from operating revenues and cash payments for operating expenses are rearranged so as to get cashflow from operating activities. Direct quotation/European quotation is expressed in a manner that reflects the exchange of a specified number of domestic currencies vis-à-vis one unit of foreign currency. Direct quote – When the number of units of home currency to deal in one unit of foreign currency is given, it is called ‘direct quote’. Dirty float – When the central bank of a country engaged in market transactions to influence the exchange value of its currency, but the rate is basically a floating rate, the policy is called ‘managed float’ or ‘dirt float’. Discount charge is the interest charge for short-term financing by the factor for the period between the date of advance payment and date of guaranteed payment/collection. Discount is the amount by which a bond sells below its par/face value. Discounted cashflow techniques – Under discounted cashflow techniques, the future net cashflows generated by a capital project are discounted to ascertain their present values. Discounted payback period is ascertained by accumulating the present values of net cash inflows year after hear, till the original cash outlay is recovered. The discounting of cashflows is done as in case of NPV method. Discounting is determining the present value of a future amount. Disinvestment is a process in which the holding concern reduces its portion in equity by disposing its shareholdings. The disinvestment reduces the government’s participation in the company. The disinvestment is exercised by resorting to trade sale, strategic sale, offer of shares, and sale of assets and closure of undertaking if it cannot be revived. Distribution is the sale of securities to the ultimate investors. Distribution pattern – If proportionate price changes are randomly generated events, then their distribution should be approximately normal. Diversifiable/unsystematic risk is the portion of a security’s risk that is attributable to firm- specific random causes; can be eliminated through diversification. Diversification project is an investment decision to setup an entirely new project which is not connected with the existing line of business with a view to increase asset base, increase in turnover and profits, reduced level of business risk, etc. Divestiture – In divestitures, the company who has acquired assets and divisions will make an examination to determine whether the assets or divisions fit into overall corporate strategy in value maximization. If it does not serve the purpose, such assets or divisions are hived-off. Dividend clientele is a group of investors favouring a particular kind of dividend policy. The company should be able to analyze its dividend clientele before taking dividend decisions.

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Financial Management - Key Terms

Dividend cover indicates the number of times the dividends are covered by the profits available for distribution. Dividend decision emphasizes on distribution of profits and retention policies and its impact on share value of the company. The dividend decisions also include the decisions relating to profits to be retained by the firm. Dividends deplete the cash resources, which can otherwise be available for the investment in profitable projects. Dividend declaration date is the date on which the announcement is made of new dividend. Dividend growth method – An allowance for future growth in dividend is added to the current dividend yield in computation of cost of equity capital. Dividend irrelevance implies that the value of the firm is unaffected by the distribution of dividends and is determined solely by the earning power and risk of its assets. Dividend payout (D/P) ratio measures the proportion of dividends paid to earnings available to shareholders. Dividend payout indicates the extent of the net profits distributed to the shareholders as dividend. A high dividend payout indicates a liberal dividend distribution policy. Dividend policy involves decision to pay out earnings or to retain them for re-investment. Dividend refers to the corporate net profits distributed among shareholders. Dividend relevance implies that shareholders prefer current dividends and there is no direct relationship between dividend policy and market value of a firm. Dividend signalling – The dividend changes provide an effective way to convey believable information to the market about the firm’s expected future cashflows. Dividend stability refers to the payment of a certain minimum amount of dividend regularly. Dividend valuation model assumes that the value of a share equals the present value of all future dividends that it is expected to provide over an indefinite period. Dividend yield method – The cost of equity capital is defined as the discount rate that equates the present value of all expected future dividends per share with the current market price of share. Dividend yield reflects the percentage of yield an investor receives on his current market price of a share. Dividends are periodic cash payments by the company to its shareholders. The dividends payable to preference shareholders is usually fixed by the terms of the issue of preference shares. But the dividend on equity shares is payable at the discretion of the Board of Directors of the company. Divisible profits are those profits which can be legally distributed in the form of dividend to the shareholders. All the profits of company are not divisible. Divisible project is a project which can be accepted in parts. Documentary credit is the trade between two countries financed mainly through letters of credit. Domestic lease is a lease transaction if all parties to the agreement are domiciled in the same country.

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Financial Management - Key Terms

Domestic resource cost (DRR) represents the resource cost of a product manufactured indigenously without importing such product or cost of such product if it can be exported. Double leverage includes leverage both in personal portfolio as well as in the firm’s portfolio. Dow Theory advocates that the way stock prices behave is 90% psychological and 10% logical. It is the mood of the crowd which determines the direction in which prices move and the move can be gauged by analysing the price movement and value of transaction. Downstream merger – When a firm acquires it downstream from it, it extends to those firms that sell eventually to the consumer. Du Pont chart is the chart of financial ratios which analyses the net profit margin in terms of assets turnover. It indicates that the return on investment is ascertained as a product of net profit margin ratio and investment turnover ratio. Earning power is the overall profitability of a firm. It is computed by multiplying net profit margin and assets turnover. Earnings per share (EPS) are a measure of net profit earned per share. A higher EPS means better capital productivity and economic performance of the company. Earn-out is the sale of shares/stake of venture capital institution to entrepreneurs/investee companies themselves. Earn-out plan is a plan for payment to shareholders of target firm in merger that is linked to the earnings of the firm. EBIT-EPS analysis involves comparison of alternative methods of financing at various levels of EBIT. EBIT-EBS analysis is an important tool in capital structure. The optimum capital structure can be determined by taking into consideration the financial break-even and financial indifference points. EBIT-EPS analysis/approach is an approach for selecting capital structure that maximises earnings per share (EPS) over the expected range of earnings before interest and taxes. Economic exposure implies change in the value of a company that accompanies an unanticipated change in exchange rates. Economic order quantity (EOQ) – It is the optimum size of the order for a particular item of inventory, at that point the ordering costs and carrying costs of inventory are minimized. Economic order quantity (EOQ) model is the inventory management technique for determining optimum order quantity which is the one that minimises the total or its order and carrying costs; it balances fixed ordering costs against variable ordering costs. Economic rate of return (ERR) is a rate used to discount economic benefits and economic costs of a project, to bring them to equality. ERR is the rate of return to the national economy arising out of project. Economic risk is concerned with the general economic climate within the country. The exchange rate fluctuations may be due to the conditions of economy of different countries which will have impact on the currencies of respective countries.

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Financial Management - Key Terms

Economic value added (EVA) implies the difference between operating profits after taxes and total cost of funds. Economic value added is equal to after-tax operating profits of a firm less the cost of funds used to finance investments. Economic value added (EVA) – The excess of return over cost of capital is term as ‘economic value added’. EVA measures whether operating profit is sufficient enough to cover cost of capital and how much EVA is generated to justify risk taken by the shareholders. Effective rate of protection (ERP) indicates the degree of protection given by the national economy to the indigenous product, which is indicated by the favourable difference in value addition at domestic prices as compared with international prices. Efficiency audit is conducted to appraise or scrutinize the actual performance with reference to expected efficient standards and to ensure that the amount invested yields optimum results. Efficiency ratios – The efficiency in working capital management is measured by computing the ratios like working capital to sales ratio, inventory turnover ratio and current assets turnover ratio. Efficient frontier – The Mean-Variance Model explains the risk-return relationship with the help of efficient frontier concept. If all the investments are plotted on the risk-return sphere, individual securities would be dominated by portfolios and efficient frontier would be taken shape indicating investments which yield maximum returns and the level of risk is maximized. Efficient market hypothesis – Under this theory, it is assumed that information is known freely to all investors, spontaneously transmitted to the markets to establish share price. The share price movements occur as a reaction of the new information learnt by the investors. Efficient markets embrace all information and arbitrage opportunities do not exist. Efficient portfolio – Efficient portfolio maximises returns for a given level of risk or minimises risk for a given level of return. e-IPO – The companies are now allowed to make public issue through the on-line system of stock exchanges. Electronic cash management refers to the networked cash management system to ensure faster and reliable mobility of funds by adopting latest information technologies. Employee stock option is a contract that gives the employee the right, but not the obligation, to subscribe to an entity’s shares at a fixed or determinable price for a specified period of time. Engineering, procurement and construction (E.P.C.) – In this, the contractor takes complete responsibility to construct, erect, commission and supply the plant and keeps it ready to operate by the owner. Equal annual cost (EAC) converts the present value of costs of unequal-lived mutually exclusive projects into an equivalent annual amount/cost. Equal annual net present value (EANPV) approach evaluates an unequal-lived project that converts the net present value of unequal-lived mutually exclusive projects into an equivalent (in NPV terms) annual amount. Equilibrium – In equilibrium, the expected return of a portfolio is equal to risk-free rate plus a risk premium.

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Financial Management - Key Terms

Equity carveout – In equity carveout, a parent company sells a portion of its equity in a wholly owned subsidiary to the general public or to a strategic investor to generate cashflow. Equity represents the shareholders’ funds which include equity share capital, preference share capital, reserves and surplus less accumulated losses. Equity shares – The holders of equity shares are the owners of business and surplus earnings are available to them after meeting all finance charges, tax provisions and preference dividend. The equity shareholders will have right to vote on every resolution placed in the members meeting and voting rights shall be proportion to the paid-up capital. Equity warrant – Sometimes the equity warrants are attached with non-convertible debentures which give the right to the holder of the debenture to apply and acquire specified number of equity shares at a future specified date. Ethical fund integrates personal values and social concern with that of investment decision making process and performance and considers the investment’s impact on society or environment. Euro bond market permits the lenders to lend directly to the borrowers across national borders, without the intermediation of bank. Euro bonds are placed simultaneously in many countries through multinational syndicates of underwriting banks who sell them to an investment clientele throughout the world. Euro currency market provides medium and short-term debt required by banks, corporate and government, by transferring the domestic deposits through the banking system to outside the controlled domestic monetary system. The finance available from euro currency market is generally in the form of fixed interest loans, standby credits, roll-over loans, syndicated loans. Euro issue denotes that the issue is made abroad through instruments denominated in foreign currency and securities issued are listed on overseas stock exchanges. European call option can be exercised only on maturity. European medium term notes (EMTNs) are continuously issued notes, which are usually unsecured, with maturities ranging from nine months to 10 years. They allow the borrower flexibility with respect to maturity profiles and timing of issues. European option – In European option, the holder of the option can exercise his right (if he desires) only on the expiration date. Event is an occurrence, planned and scheduled for specific happening. Exchange rate is the price of one currency expressed in terms of the currency of another country. Exchange rate is the rate of conversion of one currency into another. The number of units of one currency expressed in terms of a unit of another currency. Exchange risk arises due to fluctuations in the currency of borrowing vis-à-vis the currency in which the payments are to be effected to the overseas suppliers. In case of foreign currency financing, the liability of borrower may increase due to adverse fluctuations in exchange rate.

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Financial Management - Key Terms

Exchange traded fund (ETF) is a security that tracks an index but has the flexibility of trading like a stock. An ETF does not mobilize cash subscriptions but by calling upon the big market players to surrender their investments comprised in the index and a jumbo unit is issued to the investor; later such jumbo unit will again be broken down into marketable small units. Ex-dividend date is the date on which stock begins to trade without the rights to receive the dividend declared. Exercise price is the price at which holders of warrant can purchase a specified number of shares. Expansion project – The existing plant capacity can be expanded with a view to produce a large volume of output than the current level. Expected return in a CAPM context is the risk-free rate plus a premium for systematic risk based on beta. Expected return is the return that is expected to be earned on a given security over an infinite time horizon. Expected value – The probability of occurrence of cashflows will help estimating the expected values, which is a useful summarising technique and it takes into account the expected variabilities of all outcomes. Expected value of a return is the most likely return on given asset/security. Explicit cost is the rate of interest paid on debt. Explicit cost is the rate of return associated with the best investment opportunity foregone. Explicit cost is the rate that the firm pays to procure financing. Exposure is a measure of sensitivity of the value of financial items (assets, liabilities, or cashflows) to change in variables like exchange rates, interest rates, inflation rates, relative prices, etc. Exposure measurement means trying to gauge the degree to which a firm is affected by exchange rate changes. Ex-rights – After the dealings started in the newly issued rights shares, the rights no longer exist and old shares are now ex-rights (without rights attached). Extended CAPM adds variables additional to beta to the model. External Analysis is done by outside agencies like investors, financial analysis, lenders, government agencies, research scholars, etc. External commercial borrowings (ECBs) are the borrowings made by corporate and financial institutions from international markets for a maturity period of over 180 days and with a relative lower financing cost. External commercial borrowings refer to commercial loans in the form of bank loans, buyer’s credit, securities instruments, such as floating rate notes and fixed interest bonds availed from non-resident lenders with minimum average maturity of 3 years. External funds requirement (EFR) – While calculating of EFR, expected change in investments, miscellaneous expenditure and scheduled repayment of term-loans and debentures are assumed to be zero. External risk component of country risk arises due to situations outside the country.

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Financial Management - Key Terms

Factor is a financial institution that specialises in purchasing accounts receivables from business firms. Factoring involves the outright sale of receivables at a discount to a factor to obtain funds. Factoring is a method of financing working capital whereby the company sells its trade debts at a discount to financial institution called ‘factor’. The factor makes immediate payment up to 80% of the invoice value and the balance 20% amount is paid on due date, after deducting its commercial charges. Fair value is the average of book value, market value and intrinsic value. Fair value is the price to be agreed upon in an open and unrestricted market between parties and equationally expressed as: a representative level of earnings ¥ appropriate capitalisation rate. Feasibility – Before the finalization of a capital investment decision, a feasibility study will be conducted to confirm about the techno-commercial feasibility. The feasibility study report contains brief details which are substantial in making the capital investment decision. Fidelity bond is a contract in which a bonding company agrees to reimburse a firm up to a stated amount for financial losses caused by dishonest acts of managers. Filters are designed to isolate the primary trends from minor price changes arising from random factors. Finance (capital) leases are for terms that approach the economic life of the asset; the total payments over the term of the lease are greater than the lessor’s initial cost of the leased asset. Finance decisions assert that the mix of debt and equity chosen to finance investments should maximize the value of investments made. Finance is the art and science of managing money. Financial advisor acts as a principal advisor on financial matters to the chief executive of the enterprise and renders financial advisory services to the committees. Financial and NEDC risks trade-off – The financial risk arises due to use of debt in capital structure. NEDC risks arise out of non-employment of debt capital in the capital structure. In determining the optimum level of debt-equity combination, the Finance manager has to balance the financial and NEDC risks by minimizing the total risk/costs. Financial asset/instrument/security is a claim against another economic unit and held as a store of value and for the expected return. Financial break-even point (BEP) is the level of EBIT which is equal to firm’s fixed financial costs. Financial break-even point is the point where fixed interest charges are just equal to EBIT. It denotes the level of EBIT for which firm’s EPS is just equal to zero. Financial budgets are concerned with expected cash flows, financial position and result of operations. Financial cashflows are cashflows generated by the financial activities of the firm. Financial cashflows arise from variations in long-term capital. It includes cash from issue of shares and debentures, repayment of term loans, etc. Financial closure – After the necessary government clearances obtained and after entering into loan agreements, the project in all aspects ready for implementation and this state of readiness for monetary support of project is called ‘financial closure’.

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Financial Management - Key Terms

Financial distress and agency costs – When the leverage of the firm is extremely high, it is likely to run into the costs of financial distress and bankrupting, and agency costs. Financial distress includes a broad spectrum of problems ranging from minor liquidity shortages to bankruptcy. Financial engineering involves the design, development and implementation of innovative financial instruments and process and the formulation of creative solutions to problems in finance. Financial forecasting provides ground for updation of financial plans to the changes in economic environment and business situations. It is used as a control device to set the way for firm’s future course of action. Financial forecasts provide basic and necessary information for setting of objectives of firms and for preparation of its financial plans. Financial indifference point is the situation when two alternative financial plans to produce the level of EBIT where EPS is the same. The EBIT at indifference point explains that the EPS for two methods of financing is equal. Financial intermediaries convert direct financial assets into indirect securities. Financial intermediation is a sort of indirect financing in which savers deposit funds with financial institutions who in turn lend to the ultimate borrowers. Financial lease – In a financial lease, the lessor intends to recover his capital outlay plus required rate of return of funds used in financing the asset. Financial lease is a non-cancellable contractual commitment on the part of the lessee, who acquires most of the economic values associated with the outright ownership of the asset at the end of the lease period. Financial leverage is caused due to fixed financial costs (interest). Financial leverage refers to the use of debt component in capital structure and the effect of payment of fixed interest on firm’s profitability. It is expressed as EBIT/EBT. A high financial leverage indicates a higher percentage of debt in the capital structure. It conveys interest burden on the firm. Financial management is concerned with the duties of the financial managers in the business firm. Financial managers actively manage the financial affairs of any type of business, namely, financial and non-financial, private and public, large and small, profit-seeking and not-for- profit. Financial market refers to mechanism between saver-Lenders and borrower-Spenders. Financial markets are the channels through which funds flow from one market participant to another. Financial markets provide a forum in which suppliers of funds and demanders of loans/ investments can transact business directly. Financial planning model is a mathematical model of the master budget that can react to any set of assumptions about sales, cost of product mix. Financial reconstruction – In financial reconstruction scheme, the capital amounts and asset values are reduced to write-off past losses and to rearrange the capital structure of the business to make a turnaround of business.

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Financial Management - Key Terms

Financial restructuring refers to financial reorganization of a company by affecting change in the capital structure for achieving balanced operational results by bringing balance in debt and equity funds, short and long-term financing, reduction in finance charges, measures to improve EPS, etc. Financial risk is the risk of being unable to cover required financial obligations such as interest and preference dividends. Financial risk is the risk of not being able to cover fixed financial costs by a firm. Financial sector reforms aim at promoting a diversified, efficient and competitive financial sector with ultimate objective of improving the allocative efficiency of available resources, increasing the return on investment and promoting accelerated growth of real sectors of economy. Financial services are concerned with the design and delivery of advice and financial products to individuals, businesses and Governments. Financial state analysis is the study of relationship among various factors in a business as disclosed by the financial statements of a firm, to obtain a better sight into a firm’s financial position and performance. Financial statement is an organized collection of data according to logical and consistent accounting procedures. Financial structure consists of equity, long-term debt and also current liabilities. Financial system includes a complex of institutions and mechanism which affects generation of savings and their transfer to those who invest. Financially weak company is a company whose accumulated losses result in erosion between 50 – 100 per cent of its net worth. Financing activities result in changes in the size and composition of the owner’s capital (including preference share capital) and borrowings of the enterprise. Financing decision relates to the choice of the proportion of debt and equity sources of financing. Financing flows are cash flows that result from debt/equity financing transactions and include incurrence and repayment of debt cashflows from the sale of shares and cash outflows to purchase shares or pay dividend. Financing mix is the choice of sources of financing of current assets. First Chicago method is a method of valuation that considers the entire earnings stream of the venture capital undertaking/investor companies. Fisher effect states that in equilibrium lenders will receive a nominal rate of interest plus an amount sufficient to offset the effect of expected inflation. Fixed costs are fixed for a relevant range of volume for a given budget period. Fixed exchange rate – When the rate of exchange of any country fixes its own currency it is called ‘fixed exchange rate’ or ‘official exchange rate’. Fixed interest bearing funds include debentures, long-term loans and preference share capital. Flexibility as to financing is important when future external financing will be necessary.

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Financial Management - Key Terms

Flexibility option is an option to redesign the production process by reconfiguring the plant/equipment. Flexible budget estimates costs at several levels of activity. Float refers to the time difference between the payments is initiated and funds available in the bank account in spendable form. Floating charge – With creation of floating charge on current assets, the borrowing firm gives the lender a general claim against the current assets which are floating. The lender’s rights on current assets will be crystallized only when the borrower defaults in payment of his dues. Floating debt rate – In floating debt rate, a certain percentage of interest will be of fixed nature. Over and above the fixed rate of interest, the lender will charge extra rate of interest depending on the market conditions. Floating exchange rate – When the foreign exchange rates move depending on the demand and supply pressures and will be further influenced by market forces and economic conditions of the respective countries, it is called ‘floating exchange rate’. Floating rate bond – The interest paid to the floating rate bond holders’ changes periodically depending on the market rate of interest payable on the gilt-edged securities. Flotation cost is the total cost of issuing and selling securities. Flotation cost is the cost involved in raising capital from the market. Flow of funds refers to transfer of economic values from one asset equity to another. FNSD analysis – It analyses the inventory into Fast moving items, Normal moving items, Slow moving items and Dormant items to analyze the turnover position of each item of inventory. Follow on public offering is an existing listed company makes a fresh issue of securities to the public or makes an offer for sale of securities to the public for the first time through an offer document. Forecast is a prediction of what is going to happen as a result of a given set of circumstances. Forecasting – When a systematic estimate of future conditions is made it is called ‘forecasting’. Forecasting aims at reducing the uncertainty in decision making. While forecasting, both micro and macro-economic factors will be considered. Foreign currency convertible bonds (FCCBs) are issued in accordance with the scheme and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in the manner stated in offer document. Till the conversion, the company has to pay interest on FCCBs in foreign currency and if conversion option is not exercised, the redemption has to be done in foreign currency. The bonds are unsecured in nature. Foreign currency convertible bonds are subscribed by a non-resident in a foreign currency and convertible into ordinary shares of the issuing company in India.

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Financial Management - Key Terms

Foreign Currency Exchangeable Bonds (FCEB) means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Indian (issuing) company and subscribed to by a person who is a resident outside India in foreign currency and exchangeable into equity shares of another company. FCEBs are financial instruments similar to FCCBs in nature. FCEBs will allow corporate to raise money from overseas markets by issuing bonds. In case of FCCBs, bonds can be converted into equity shares of the issuing company. But in case of FCEBs, the bonds can be converted into shares of a group company of the issuer. Foreign currency reserves are the official currency reserves maintained by the central bank of a country. The reserves are used to meet current and other liabilities of a country. The central bank could use these reserves for intervention purposes also. The foreign currency reserves are also called as ‘forex reserves’. Foreign Direct Investment (FDI) – The foreign investors making a direct investment in long-term capital projects in India with longer lock-in period is called ‘Foreign Direct Investment (FDI)’. Due to long lock-in period, FDIs influence in foreign exchange rate is less due to less volatility. FDIs contribute to employment generation and country’s industrialization. Foreign exchange exposure is the sensitivity of the real value of an undertaking’s assets, liabilities or operating incomes expressed in its functional currency to unanticipated changes in exchange rates. Foreign exchange market is the place where currencies of different countries are bought and sold against each other. Foreign exchange rate risk arises when the rate of exchange between two currencies move adversely to the particular firm under consideration. Foreign exchange risk is the possibility of loss on account of unfavourable movement in foreign exchange rates. Foreign Institutional Investors (FIIs) like pension funds, mutual funds, investment trusts, asset management companies, etc., who are incorporated and regulated outside India but make investment in India. The Government of India has allowed FIIs to invest in all type of securities in primary and secondary capital markets. As a precondition the FIIs have been required to obtain registration from the SEBI and approval from RBI. Forward contract – In forward contract, an agreement is entered into between the buyer and seller today to exchange the commodity or instrument for cash at a predetermined future date at a price agreed upon today. Such predetermined prices is called ‘forward price’. Forward contract is an agreement to buy (long position) or sell (short position) an asset/security on a specified date for a specified price; settlement happens at the end of the period. Forward contract is simply an agreement to buy or sell foreign exchange at a stipulated rate at a specified time in future. A forward contract locks to particular exchange rate, thereby insulating from exchange rate fluctuations. Forward discount – If the forward rate is lower than the spot rate, the difference is called ‘forward discount’. Forward exchange rate is the rate of exchange applicable for delivery of foreign exchange at a future date.

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Financial Management - Key Terms

Forward integration is the creation of facilities for manufacturing products for which the current products of the organization serve as inputs. Forward premium – If the forward rate is higher than the spot rate, the difference is called ‘forward premium’. Forward rate agreement is an agreement between two parties who wish to protect themselves against interest rate fluctuations by locking the interest rate when the concern is to discharge debt under floating rate obligations. Forward rate discount foreign currency is at discount when its spot rate is higher than the forward rate. Forward rate is the currency rate quoted not for delivery at some future specified date, e.g., in three months. Forward rate premium foreign currency is at premium when its forward rate is higher than spot rate. Forward to forward contract is a swap transaction that involves the simultaneous sale and purchase of one currency for another, where both the transactions are forward contracts. Forward trading provides the facility of carrying forward the transactions from one settlement period of seven days to another settlement period. It is also called as ‘badla trading’. Founders’ shares – A private company may issue shares to promoters or directors as consideration for bring the company into existence. These shares will increase the management control of promoters. These shares will also be issued in exchange of shares of the vendor company as purchase consideration. Franchising – In franchising, a large firm establishes linkage with small firms and allows them to use technology or sell products/services by using the brand of a large firm for a predetermined share of fees/commission/profit payable by the small firms. Free cash flows are after-tax operating earnings from acquisition plus non-cash expenses applicable to the target firm less expected additional investments in long-term assets and working capital. Friendly takeover – In friendly takeover, the purchaser will acquire the shares in a target company after thorough negotiations and agreement with the seller. Fringe market is a disorganised money market and includes activities like intercorporate deposit market, small scale trade financing, financing of investments in the stock market, discounting and lending against IOU or promissory notes, etc. Fund – The term fund refers to all financial resources of the company. Fundamental analysis suggests that every stock has an intrinsic value, and tries to value the underlying factors in a business and estimate the intrinsic value of stock should be equal to the present value of the future stream of income of the stock discounted at an appropriate risk related rate of interest. Funds flow analysis refers to movement of funds which in turn changes in working capital position of the organization and highlights inefficiency in funds management.

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Financial Management - Key Terms

Funds flow statement highlights the amounts raised from various sources of finance during a period and then explains how that finance has been used in the business. Fungibility means division or conversion into smaller parts. Two-way fungibility means conversion into smaller parts and vice versa. In the sense of ADRs/GDRs, fungibility means division of depository receipts into local shares and two-way fungibility includes conversion of depository receipts into local shares and vice versa. Further Public Offer (FPO) is an offer of shares/convertible securities by a listed issuer including an offer for sale in a listed issuer. Future contract/futures are an agreement between two parties to buy/sell an asset/security at a certain time in future; it follows daily settlement. Future value of ordinary annuity – In this, the payments or receipts occur at the end of each period and the sum of future value of all annuity payments or receipts are ascertained at the end of certain period. Futures contract is a standardised agreement to buy/sell a specified amount of foreign currency in future at some future date. Futures contracts are similar to forward contracts, but differing in some characteristics. Futures contracts are standardized, exchange traded and is subject to rules and regulations of the exchange. The quantity and grade of commodity in each contract is also predetermined. Futures exchange – In futures contracts, the obligation of the buyer and the seller is not to each other but to the clearing house called ‘Futures Exchange’, which ensure the elimination of the counterparty risk or default risk of any transaction. Gearing indicates the relationship between loan funds and networth of the company. It refers to the amount of debt finance a company uses relative to equity finance. A company with high level of debt component in its capital structure is said to be ‘highly geared’ and vice versa. If the proportion of debt to equity is low, a company is said to be low-geared and vice versa. General Price index is used for the purpose to indicate the inflation tendencies in purchasing power of money and it ignores the actual raise or fall in the price of a given item. Geographical arbitrage is the buying of foreign currency from a foreign exchange market where it is cheaper and selling in another foreign exchange market where it is costly. Gilt-edged securities – The Government securities/bonds, the world over, are known as guilt-edged securities. This is due to the near riskless nature of Government debt. The Central Government issues securities for terms ranging from 1 to 10 years either at a fixed rate or through auction, they are relatively less liquid than T-bills and demand is mainly from banks. Global Depository Receipts (GDRs) is an instrument which allows Indian corporate, banks, non-banking financial companies, etc., to raise funds through equity issues abroad to augment their resources for domestic operations. GDRs are issued in other countries except in America; otherwise the characteristics of both ADRs and GDRs are similar. Goals are quantitative targets to be achieved in specified period. Going concern concept – It is assumed that accounts are drawn upon the basis that enterprise will continue in operation existence for the foreseeable future.

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Financial Management - Key Terms

Going long – Buy a future to agree to take delivery of a commodity. This will protect against a raise in price in the spot market as it produces a gain if spot price rise. Buying a future is said to be going long. Going private – Sometimes, a listed company may decide to go private by purchase of stocks from outside public and delisting the shares in the stock exchanges where shares are traded to avoid the fall in share prices, to avoid declaration of periodical results to the public. Going short – Sell a future to agree to make delivery of a commodity. This will protect against a fall in the spot market as it produces a gain if spot prices fall. Selling a future is said to be going short. Gold ETF investors hold gold in proportion to the number of units of Gold ETFs wherein, each unit of Gold ETF implies a certain value of the metal. Investors can buy Gold ETF units from both primary and secondary markets. Gordon and Linter view argue that dividends are preferred to capital gains since the capital gains resulting from retaining of earnings are less certain and more risky than dividends. Gordon growth valuation model proposes that the value of a share reflects the value of future dividends accruing to that share, and the market price of the share is equal to the sum of its discounted future dividend payments. Gordon model is the common name for the constant growth modal widely cited in divided valuation. Green shoe option is an option allowing the issuing company to issue additional shares when the demand is high for the shares when flotation is on. Green shoe option is the option for stabilisation of the post-listing price of securities in a public issue by allotting excess shares. Greenfield privatization – The concept of Greenfield privatization lays emphasis on reforming of PSEs through reduction of government’s involvement in PSEs by disinvestment; and to concentrate more on selective activities and investments that are focussed on strategic high-tech and essential infrastructure. Gross profit margin measures the percentage of each sales rupee remaining after the firm has paid for its goods. Gross profit represents the excess of sale proceeds over the cost, before taking into account administration, selling and distribution and financing charges. Gross working capital means the current assets which represent the proportion of investment that circulates from one form to another in the ordinary conduct of business. Gross working capital refers to the firm’s investment in current assets only. Group reorganization is a form of corporate reorganization which involves transfer of assets; say the shares from one Group Company to another under the same management. Growth company experiences above average growth in sales and earnings. Growth option is an option to expand production/markets if sales exceed expectation. Growth Ratios measure the rate at which the firm should grow.

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Financial Management - Key Terms

Growth Stock possesses superior return capabilities when compared to other stocks in the market with similar risk characteristics. Guaranteed Bonds are issued on the guarantee for repayment is given by the parent company/government. Hand-off nurturing is the passive role played by venture capital funds in formulating strategies/policy matters. Hands-on nurturing is a continuous and constant involvement in the operations of the investee company by the venture capital institution which is institutionalised in the form of representation on the board of directors. Hedge funds – The term ‘hedge fund’ generally identifies an entity that holds a pool of securities and other assets. These are private investment pools that invest aggressively in all types of markets, with managers of the funds receiving a percentage of investment profits. The hedge funds will not be registered as a mutual fund. Hedgers transfer risk of price changes to the other holders who are willing to accept risk. Hedgers wish to eliminate or reduce the price risk to which they are already exposed. Hedging the foreign exchange risk means actions taken to reduce the exposed position of a company while dealing in foreign currencies. Hire purchase contract allows one party to acquire possession of goods belonging to another party by an initial deposit, followed by a number of instalments over a specified period of time and the title to the asset will pass on to the hire purchaser after payment of final payment. The hire purchaser can claim depreciation as well as charge of interest as business expenditure. Hire-purchase agreement is a peculiar type of transaction in which goods are let on hire with an option to the hirer to purchase them. Historic weights are based on actual capital structure proportion to calculate weights. Holder – The buyer or purchaser of the option is called ‘holder’. Holding company – When a company acquires more than 50% voting power or controls composition of Board of Directors, it becomes holding company. When 100% of voting power is controlled in a subsidiary, it becomes ‘wholly owned subsidiary’. Homemade leverage can replicate the firm’s capital structure, thereby causing investors to be indifferent to it. Horizontal analysis is an analysis done for several years, simultaneously, at a time for making conclusions. Horizontal consistency is the adoption of same accounting policies, methods and practices from year to year by the same entity.

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Financial Management - Key Terms

Horizontal merger is a merger when two or more firms dealing in similar lines of activity combine together. Horizontal merger takes place between two companies which are operating in the same market, who are competitors manufacturing, selling, distributing the similar type of products. Hostile takeover is the acquisition of the firm (target) by another firm (the acquirer) that is not supported by management. In hostile takeover, the purchaser will acquire shares carrying voting rights in open market in secret, to acquire control over the target company. Hypothecation is the use of inventory as a security/collateral to obtain a short-term loan. Implicit cost – The trade credit has implicit cost. The suppliers would add up interest, administrative expenses, loss due to risk of bad debts, etc., to the cost of supplies. Implicit cost is the increase in cost of equity due to increase in debt. Implicit investment rate is the rate at which interim cash flows can be invested. Implied price of a warrant is the price effectively paid for each warrant attached to a bond. Incentive plans tie management compensation to share price. Income gearing – The inverse of interest cover is called ‘income gearing’, indicating the proportion of pre-tax earnings committed to prior interest charges. The lower percentage indicates the company’s ability to meet interest obligation in time. Income notes are instruments which carry a uniform low rate of interest plus a royalty on sales. Income statement depicts the expenses incurred on production, administration, sales and distribution and sales revenue and net profit or loss for a particular period. It shows whether the operations of the firm resulted in profit or loss at the end of particular period. Incremental analysis involves computation of IRR of the incremental outlay of the project requiring bigger initial investment. Incremental cash flows are the additional cash flows (outflows as well as inflows) expected to result from a proposed capital expenditure. Independent cash flows are cash flows not affected by cash flows in the preceding or following years. Independent projects are all profitable projects that can be accepted. Independent projects are projects whose cash flows are unrelated/ independent of one another, the acceptance of one does not eliminate the others from further consideration. Index futures are a future contract that gives the owner the right/obligation to buy/sell the portfolio of stocks characterised by the index. Indexed bonds retain the security and fixed income of the debenture and at the same time provides safeguard against inflation. Indifference curves show the risk-return indifference for a hypothetical investor. All points lying on a given indifference curve offer the same level of satisfaction. Indifference point is the EBIT level beyond which benefits of financial leverage accrue with respect to EPS.

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Financial Management - Key Terms

Indirect bankruptcy costs are costs of the threat of bankruptcy in terms of disruption of normal business and adverse effect on sales. Indirect method – Under this method, net profit is taken as a base and adjusts it to arrive at cashflows from operating activities. Indirect quotation/American quotation is expressed in a manner that reflects the exchange of a specified number of foreign currencies vis-à-vis one unit of local currency. Indirect quote – The number of units of foreign currency is given to deal in one unit of home currency. Indivisible project is a project which can be accepted/rejected in its entirety. Inflation is an increase in the average price of goods and services. It is a situation where there is general and overall increase in price of goods and services and it causes the erosion of purchasing power of money. Information content is the information provided by dividends of a firm with respect to future earnings which causes owners to bid up or down the price of shares. Initial public offer (IPO) is an offer of shares/convertible securities by an unlisted issuer to the public for subscription including an offer for sale by existing shareholders in an unlisted issuer. Initial public offering – It is an unlisted company making a fresh issue of shares to the public for the first time and it requires enlisting the securities in recognized stock exchange. Input-output ratio indicates the relationship between the quantity of material used in production and the quantity of final output. Insider trading denotes dealing in a company’s securities on the basis of confidential information relating to the company, which is not published and not known to the public, used to make profit or avoid loss in transactions in securities of the company. Interest cover represents how many times interest charges are covered by funds that are available for payment of interest. This ratio is calculated to analyze the company’s ability to meet interest obligations. It is expressed as number of times interest earned. It is measured as a ratio of profit before interest and tax to interest charges. The more the number of times interest earned, safer the position of debt providers. Interest coverage (time-interest-earned) ratio measures the firm’s ability to make contractual interest payments. Interest rate cap – Under interest rate cap, the buyer of a cap pays the seller a premium in return for the right to receive the difference in the interest cost if market interest rate rises above a stipulated ‘cap rate’. An interest rate cap limits the borrower’s floating interest rate to a specific level for a specified time. Interest rate ceiling – The borrowers who have floating rate of debt use ceilings to protect themselves from a rise in interest rates. Interest rate collar is a transaction, which combines both the purchase of a cap and sale of a floor. This establishes a desired band in which buyer of the collar wants to operate in. If interest rate rise above the cap, the buyer of collar will be compensated for the difference and if the rate falls below the floor, he in turn pays the difference amount.

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Financial Management - Key Terms

Interest rate floor – The buyer of an interest rate floor pays the seller a premium in return for the right to receive the difference in interest payable on a notional principal amount when a specified index interest rate falls below the stipulated minimum on floor rate. Interest rate of return is a percentage discount rate used in capital investment appraisals which equates the present value of anticipated cash inflows with initial capital outlay. IRR is compared with the desired rate of return or WACC to evaluate the capital investment decision. Interest rate parity states that the difference between the spot and forward rates will exist, when all things being equal, the currency with high interest rate will sell at a discount in the forward market against the currency with low interest rate. Interest rate parity theory is a theory according to which the discount/premium of one currency in relation to another reflects the interest differentials between them. Interest rate risk – The uncertainty of future market values and the size of future incomes, caused by fluctuations in the general level of interest is called ‘interest rate risk’. Interest rate risk is the uncertainty associated with expected return attributable to change in interest rate. Interest rate swap is a financial contract between two parties who wish to change the interest payments from one currency to another or from floating to fixed interest payment obligations and vice versa. Interest rates are the measure of cost of borrowing and interest rates are dependent of factors like risk, size of loan, purpose of loan, profitability and stability of the borrower, market value of interest, general state of economy, etc. Interest swaps involve exchange of interest obligations between two parties. Interfirm comparison involves comparison of different firms’ financial ratios at the same point of time; involves comparison of a firm’s ratios to those of others in its industry or to industry average. Intermediate cash flows are cash inflows received prior to the termination of the project. Internal analysis is done by those who have access to detailed financial records of the firm like management, officers appointed by court or government, etc. Internal growth rate (IGR) is the maximum growth rate, a firm can achieve without going for external financing. Internal rate of return (IRR) is the discount rate that equates the present values of cash inflows with the initial investment associated with a project, thereby causing NPV = 0. International bank for reconstruction and development (IBRD) is popularly known as ‘world bank’, which was set up to make or guarantee loans for reconstruction and development projects and assisting third world countries, by forfaiting economic development through financial, technical and advisory aid. International credit instruments like telegraphic transfer, cable transfer, mail transfer, banker’s drafts, banker’s cheques, bills of exchange, letter of credit, and international money order are used for remittance of foreign exchange from one country to another. International development association (IDA) finances projects which have faced foreign exchange difficulties or where the service of foreign debt is very high.

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Financial Management - Key Terms

International factoring is a method whereby the factor undertakes to collect the debts assigned by the exporters and money comes to exporters only after collection of bills by the factor. International finance corporation (IFCW), Washington extends financial assistance to private sector business of the developing member nations. International fisher effect states that interest rate differences between two countries are offset by the spot exchange rate changing overtime. It is also called as ‘open fisher theory’. International forfaiting is a non-recourse purchase by a bank or other financial institution (forfaiter) of receivables arising from an export of goods and services, and exporter obtains cash immediately. International lease is a lease transaction if all parties to the agreement are domiciled in different countries. International monetary fund (IMF) is an organization of countries set up with an objective of assisting in the development of international prosperity by helping members with balance of payments deficits and to promote international monetary cooperation. Intrinsic (economic) value is the present value of incremental future cash inflows using an appropriate discount rate. Intrinsic value of a call is the excess of share price over exercise price. Intrinsic value of an option is defined as the amount by which an option is ‘in-the-money’ or the immediate exercise value of the option when the underlying position is marked to market. Inventory (stock) turnover measures the activity/liquidity of inventory of a firm; the speed with which inventory is sold. Inventory levels like reorder level, minimum stock level, maximum stock level and danger level are fixed to see that no excess inventory is carried and simultaneously there will be no stock-outs. Inventory management looks into the aspects of optimization of investment in inventory, proper accounting and control of inventory, avoid stock-out situation, avoid overstocking, regular monitoring of stock levels, availability of material in time, etc. Inventory of a manufacturing concern consists of raw material stock, work-in-process stock, finished goods stock, stock of stores and consumables, etc. Inventory turnover indicates the amount tied up in financing of raw materials, work-in-progress and finished stock. A low inventory turnover indicates high amount tied up in stocks. Investing activities relate to the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents. Investment decision relates to the selection of assets. Investment decisions are those decisions which determine how scarce resources in terms of funds available are committed to projects. Investment flows are cashflows associated with purchase/sale of both fixed assets and business interests.

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Financial Management - Key Terms

Investment incentives may be obtained for the project from Central or State Governments in the form of tax holiday, cash subsidy, rent-free land and buildings, sales tax deferment, power subsidy, etc. While computation of project cashflows the incentives and grants should be taken into account for determination of viability of project. Invisible walls – Before making project estimates one should identify and recognize the invisible walls which cause the project estimation go wrong. Issue by tender – The securities are offered to the public with a prospectus attached, but offer is not made at a fixed price, but fixing minimum price below which securities are not offered. The investors are left to tender or offer the price which they are willing to invest in securities. Joint venture is a form of business in which two different unaffiliated companies contribute finance, technology, manpower, patents, trademarks, designs, brand names, etc., for a new company formed to engage some business activity for mutual benefit. Junk bonds are bonds which carry low credit rating and to compensate for the default risk they are issued with high coupon rate than the market rate of interest. These instruments are generally used in leverage buy-out. Just-in-time refers to acquiring materials and manufacturing goods only as needed to fill customer orders. Knowledge management is the management of knowledge for creating business value and generating competitive advantage to the enterprise. Lagging implies delaying receipts from foreign currency designated receivables. Law of one price states that when there is no significant costs or other barriers associated with moving goods or services between markets, then the price of each product should be same in each market. Lead time is time normally taken in receiving delivery after placing orders with suppliers. Leading implies collection from designated debtors expeditiously foreign currency before due date. Leads and lags – Sometimes a company may make payment earlier than when the amount is due for payment, it is called ‘leads’. When the company delays the payment to avoid the adverse fluctuations, it is called as ‘lags’. Lease is an agreement whereby a lessor conveys to the lessee, in return for rent, the right to use an asset for an agreed period of time. Leasing gives the facility to possess and operate the asset without owning the asset, by paying lease rentals. In lease contract, the lessor conveys the right to use an asset for an agreed period in return for rent. Lease rentals are payable on periodical basis over the specified lease period. The lease rentals should be structured in such a way that it will be convenient for both the lessor and lessee. Lease, rehabilitate, Operate and Transfer (L.R.O.T.) – Under this, the government will give a running plant for rehabilitation to put the plant on profitability track or for increasing its production capacity, and operate it for certain period and then transfer the project to the government.

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Financial Management - Key Terms

Leasing is the process by which a firm can obtain the use of a certain fixed asset for which it must make a series of contractual, periodic, tax-deductible payments (lease rentals). Lessee is the receiver of the services of the assets under a lease contract. Lessor is the owner of the assets that are being leased and is entitled to the benefit of depreciation. Lethargy/processing float is the delay between the receipt of a cheque by the payee and its deposit in the account. Letter of credit is a document or order by a banker in one place, authorizing some other banker, acting as his agent or correspondent in another place, to honour the drafts or cheques of a person named in the document up to the amount stated in the letter. Letter of credit is a letter written by a bank stating that the bank guarantees payment of an invoiced amount if all the underlying agreements are met. Letter of intent – An appraisal of the project, if the financial institution satisfies in all aspects about the project, it will issue a sanction letter called ‘letter of intent’. Letter of offer – A listed company before making any public issue of securities shall issue an offer document called ‘letter of offer’. Level of risk depends on the object of investment and an investor who prefers to earn higher return must be prepared to bear greater risk. Leverage is the employment of an asset/source of finance for which firm pays fixed cost/fixed return. Leverage refers to the ability of a firm in employing long-term funds having a fixed interest, to enhance returns to the owners. Leveraged buy-out – In LBO, a small group of investors acquire an operating company with funds derived primarily from debt financing, the consideration for LBO is a mix of debt and equity components with high gearing. Leveraged lease – In this, the lessor undertakes to finance only a part of the money required to purchase the asset and major part of finance is arranged with the financier to whom the title deeds of the asset are assigned. Leveraged lease is a lease under which the lessor acts as an equity participant supplying a fraction of the total cost of the asset while the lender supplies the major part (balance). Lien is a publicly disclosed legal claim on collateral. Limited liability partnership (LLP) is an alternative corporate business vehicle that gives the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a traditional partnership. An LLP will have a separate legal entity and shall have perpetual succession. Limited partnership consists of two types of partners: (i) with unlimited liability and (ii) limited liability. Line of balance is a planning and monitoring the progress of an order, project or program to be completed by a target date. In LOB tasks are represented by vertical bars of a length, proportional to their production requirements and are plotted sequentially in vertical bar chart.

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Financial Management - Key Terms

Line of credit is a commitment by a bank, at extra charge, to lend a certain amount of funds on demand specifying the maximum amount of unsecured credit. Line of credit is an agreement between a bank and a firm specifying the amount of short-term borrowing the bank would make available to the firm over a given period of time. Linear payoff implies losses as well as profits for both the buyer and the seller of futures are unlimited. Liquidation – A company which is continuously making cash losses faces technological obsolescence, and lack of market cannot continue for long and the business unit may be liquidated. Liquidation value is the price at which an asset can be sold if the firm is liquidated. Liquidation value per share is the actual amount per share if all assets are sold, liabilities including preference shares paid and any remaining money is divided among the ordinary shareholders. Liquidity hypothesis suggests enhanced liquidity. Liquidity is the ability to realize value in money, the most liquid assets. Liquidity is the ability to transform a security into cash. Liquidity ratio is the ability of a firm to satisfy its short-term obligations as they become due. Listing agreement – The stock exchange regulates the company’s behaviour through an agreement entered into with the company in order to be listed is call ‘listing agreement’. Listing enables dealings in securities on a stock exchange. Listing means admission of securities to dealing on a recognized stock exchange. Loan participation – A loan which is provided collectively by a group of banks as a measure of risk spreading. Syndicates of banks grant credit funds in the form of loans, lines of credit and other forms of long-term credit. The lead bank grants a certain portion of the loan to each participant as agreed and agrees to pay to the participants a pro rata share of receipts from the borrower. Loan syndication refers to the services rendered by the financial service expert or firm in procurement of term loans and working capital facilities from financial institutions, banks and other financing and investment firms for its clients. Loan transfer – When an existing lender transfers his loan assets to the other party, it is called as ‘loan transfer’. Lock-box system is a collection procedure in which payers send their payments/cheques to a nearby post box that is emptied by the firm’s bank several times and the bank deposits the cheque in the firm’s account; reduces float by shortening the lethargy as well as postal and bank floats. Lock-in period – The promoters shares are subject to lock-in for a prescribed period. Lock-in indicates the freeze on transfer of shares. Long-term analysis is done with a view to determine whether the earning capacity of the firm is sufficient to meet the targeted rate of return on investment, and is adequate for future growth and expansion.

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Financial Management - Key Terms

Long-term funds include share capital, reserves and surplus and long-term loans. Majority voting is the system whereby in the election of directors, each shareholder is entitled to one vote for each share held and he can vote all shares for each director separately. Management buy-ins are funds provided to enable an outside group buy an ongoing venture/ company. Management buy-out – In MBO, the management purchases all or part of business, when the owners trying to sell business to third parties, due to its slow growth or lack of managerial skill in running the business. Manoeuvrability implies the ability to adjust source of funds in response to change in the need for funds. Margin money is to be kept with the exchange for entering into futures or options contract. This aims to minimize the risk of default by the counterparty. Margin of safety is the excess of actual sales revenue over the break-even sales revenue. Margin trading is the purchase of securities by borrowing a portion of the transaction value and the securities in the portfolio as collateral. It increases the purchasing power of investor. Marginal analysis suggests that financial decisions should be made on the basis of comparison of marginal revenues and marginal cost/added benefits exceed added costs. Marginal cost of capital is the cost of the next increments of capital raised by the firm. The new capital investment can be accepted if the IRR of the project is exceeding its marginal cost of capital. Marginal weights use proportion of each type of capital to the total capital to be raised. Market Based Ratios relate the firm’s stock price to its earnings, book value, etc., which indicates the share price movements in the market. Market capitalization of a company is said to be its share price times the number of its outstanding shares. The market capitalization of each company’s share is calculated discretely and then added up for finding the total market capitalization. Market makers intermediate between the end-users and the financial system, but unlike general financial intermediaries, they don’t act as agents for the end use. Instead they act as principals, buying and selling securities for their own account. Their service is provided to infuse liquidity for the newly entered shares into the stock market. Market portfolio – In market portfolio where the investor puts all his investments, at that particular risk level to earn desired rate of return. Market risk arises due to changes in demand and supply, expectations of the investors, information flow, investors risk perception etc. Market survey – When a new product is going to be introduced into the market, it is customary to conduct a market survey to forecast the level of demand and expectations of the potential buyers. Market value added (MVA) is the market value of the capital employed in the firm less the book value of capital employed. MVA is calculated by summing up the paid-up value of equity and preference share capital, retained earnings, long-term and short-term debt and subtracting this sum from the market value of equity and debt.

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Financial Management - Key Terms

Market value weights use market values to measure the proportion of each type of capital to calculate weighted average cost of capital. Marketable securities are short-term interest earning money market instruments used by firms to obtain a return on temporarily idle funds. Marking to market is the practice of recording the price or value of an asset to reflect its current market value rather than its book value. All outstanding contracts are appraised at the settlement price of that session is called as ‘marking to market’. Markowitz mean variance model is based on the argument that risk of an individual asset will not influence the investor’s decision to select the investment, but the investor considers that how much risk a particular investment is contributing to the total risk of the portfolio. Mark-to-market is the valuation of the portfolio with reference to the current market price. Master budget is the overall budget for the entire organisation. Matching approach – Under matching approach, to financing working capital requirements of a firm, each asset in the balance sheet assets side would be offset with a financing instrument of the same approximate maturity. Matching approach to financing is the process of matching maturities of debt with the maturities of the financial needs. Matrix approach – In portfolio management decisions, by using the matrix approach the investments are selected which fetches the highest score, based on weights given for various variables like return, safety, liquidity, image, etc. Matrix organization is a formal way of hierarchy and sharing authority between the Project manager and his team of functional managers, who are answerable to Project manager as well as the functional heads of the organizations. Maturity period is the number of years after which the par/specified value is payable to the bondholders. Maximum credit limit is a term which determines the extent to which a customer is eligible for trade credit. Mean return – The mean of probable returns over a period of years during the investment gives the expected rate of return. Means of finance – To bring the project into reality, funds will be raised in the form of issue of equity shares, preference shares, debentures, bonds, etc.; raising of long-term loans from banks and financial institutions as per the scheme of finance incorporated in the detailed project report. Merchant bank is a bank whose function is provision of long-term equity and loan finance for the corporate through issue of new securities. It is also termed as ‘investment broker’. Merger is a situation where two or more companies, keeping in view of their long-term business interest, combine into one economic entity to share risk and financial rewards. Merger is said to occur when two or more companies combine into one company. It can be either in the form of amalgamation or absorption. Mezzanine debt is the most common form of subordinate debt which is provided by the lender to an overgeared company for a higher rate of interest for accepting greater risk.

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Financial Management - Key Terms

Miller-Orr model is a model that provides for cost-efficient transactional balances and assumes uncertain cash flows and determines an upper limit and return point for cash balances. Miller-Orr model suggests the management of cash with the help of control limits. When the cash balance rises beyond the upper control limit, it is suggested to invest surplus cash in temporary marketable securities. If the cash balance drops below the lower control limit, the cash balance can be raised selling marketable securities, so that the cash balance reaches return point. Minimum operating cash is the level of opening cash balance at which a firm would meet all obligations and is computed by dividing total annual outlays by the cash turnover. Mixed costs are composed of both fixed and variable elements. Mixed stream is a series of cash inflows exhibiting any pattern other than that of an annuity. Mixed stream is a stream of cashflows that reflects no particular pattern. MM theory is considered as modern approach. According to the theory, the market value of the firm is independent of its capital structure and the rate of return required by shareholders increases linearly as the debt/equity ratio is increased. The cut off rate for new investment will in all cases be average cost of capital and will be unaffected by the type of security used to finance the investment. The process of arbitrage will prevent the different market values for equivalent firms. Originally, MM theory has ignored the corporate and personal taxation, but later Miller has modified the theory by considering tax relief available to geared firms. MM theory of dividend irrelevancy – Modigliani and Miller argue that the value of the firm is unaffected by dividend policy, and it is determined solely by the firm’s investment policy. MM further argues that the share value is a function of the level of corporate earnings. If there is a higher dividend payout, the firm should issue new shares which will depress the stock market price of the share. The reduction in value of share is just equal to the dividend distributed per share. Moderate policy – The working capital level estimated between the two extremes, i.e., restricted and relaxed policies. Modernization project – In modernization, old machines are removed and new machines are installed in its place in order to cope with changing technology and competitive business environment to improve productivity and to reduce cost of production. Money cashflows are the actual amounts of money changing hands. Money laundering involves cleansing of money earned by involving in illegal activities like drug trafficking, extortion, gun running, etc., through financial and banking system of the country. The money laundering is prohibited under ‘The Money Laundering Act, 2002’. Money market is created by a financial relationship between suppliers and demanders of short-term funds having maturities of one year or less. Money market refers to funds raised by corporate through the instruments such as debentures, bonds and other long-term debt instruments. Money market mutual funds are professionally managed portfolios of popular marketable securities having instant liquidity competitive yield and low transaction costs. Mortgage is the additional security of immovable property to obtain short-term loan.

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Financial Management - Key Terms

Moving average is a method to arrive at the average price of a security over a specified time period. The moving average can be calculated for 20, 30, 50, 100 and 200 days. MPBF – The Tandon Committee has suggested three methods of working out the maximum amount of working capital finance that a firm may expect from the bank, which is termed as ‘maximum permissible bank finance (MPBF)’. Multi-option debenture is a debenture that the gives the holder thereof two or more different options. Municipal bonds are raised by municipal bodies or local governments for financing core urban infrastructure facilities like drinking water, sanitary systems, solid waste disposal systems, internal transport, construction of roads, hospitals, etc. These bonds are issued with longer maturity periods of 5 to 7 years. Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Mutually exclusive Projects (decisions) are projects that compete with one another; the acceptance of one eliminates the others from further consideration. Naïve diversification means a portfolio consisting of stock chosen at random. Naked debentures do not carry any charge on the company’s assets. These debentures are also called as ‘unsecured debentures’. Naked option – A writer who writes option without the stock to back them up is called ‘naked option’. Near cash implies marketable securities viewed the same way as cash because of their high liquidity. Negative working capital refers to the situation when current liabilities are exceeding the current assets. Negotiable certificates of deposits are negotiable instruments representing specific cash deposits in banks having varying maturities and yields based on size, maturity and prevailing money market conditions. Negotiated finance – The finance for working capital has to be negotiated with lenders like commercial banks and it may be short-term or long-term in nature. Net asset value (NAV) – The performance of a particular scheme of a mutual fund is denoted by net asset value (NAV). NAV is the market value of the assets of the scheme minus its liabilities. The NAV per unit is the net asset value of the scheme by the number of units outstanding on the valuation date. Net cash proceeds are the funds actually received from the sale of security. Net float at a point of time is simply the overall difference between the firm’s available bank balance and the balance as shown by the ledger account of the firm. Net income approach – According to this approach any change in capital structure causes an overall change in the cost of capital and also in the total value of the firm. Net operating income approach – According to this, the value of the firm is independent of its capital structure and WACC is unchanged irrespective of the level of gearing.

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Financial Management - Key Terms

Net operating profit after tax (NOPAT) – While calculation of NOPAT, the non-operating items like dividend/interest on securities invested outside the business, non-operating expenses, etc., will not be considered. Net present value (NPV) is found by subtracting a project’s initial investment from the present value of its cash inflows discounted at the firm’s cost of capital. Net present value method – In this method, the future cashflows are discounted at minimum required rate of return of the project and then deduct it from initial outlay to arrive at the NPV of the project. If the NPV is positive, then the project can be selected. NPV method is particularly useful for the selection of mutually exclusive projects. Net profit is arrived at from gross profit after deducting administration, selling and distribution expenses. Net profit margin measures the percentage of sales rupee remaining after all costs and expenses including interest and taxes have been deducted. Net working capital change is the difference between change in current assets and change in current liabilities. Net working capital is a measure of liquidity calculated by subtracting current liabilities from current assets. Net working capital is the difference between current assets and current liabilities or alternatively the portion of current assets financed with long-term funds. Net working capital refers to excess of current assets over current liabilities. Netting – A company having overseas subsidiaries, settles the net amounts of its subsidiaries periodically, it is called ‘netting’. Network analysis is a technique used for administration of a project which consists of several activities having a definite interrelationship among them. The events and activities making up the whole project are represented in the form of a diagram or chart. Networth of a firm represents equity share capital, preference share capital and free reserves less intangible assets. New securities are offered to the investing public for the first time. Noise theory assumes that market prices of stocks differ from intrinsic values due to the existence of noise. Noise implies distorted, incorrect and incomplete information existing in inefficient markets. Nominal interest rate is the actual rate of interest paid. Non-cash transactions – Investing and financing transactions that do not require the use of cash and cash equivalents and therefore, should be excluded from a cashflow statement. Non-conventional cash flow pattern is a pattern in which an initial outflow is not followed by only a series of inflows. Non-diversifiable risk is the relevant portion of security’s risk that is attributable to market factors that affect all firms; cannot be eliminated through diversification. Non-linear pay-off implies the losses for the buyer of the option are limited but profits are potentially unlimited; profits to the writer of the option are limited to the option premium but losses are potentially unlimited.

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Financial Management - Key Terms

Non-performing asset is defined as a credit facility in respect of which the interest and/or instalment of principal remain overdue for a period of more than 90 days. Non-recourse financing – Under non-recourse financing, a loan is given by a lender whose servicing is dependent solely on the profitability of the underlying project and its future cashflows, without recourse to the other assets which are not financed under the scheme of the project. Non-systematic risk is a firm specific and can be avoided by diversification. Non-value added activities refer to those functions that do not directly increase the worth of a product to a customer. Non-voting shares neither are similar to preference shares which carries voting right nor predetermined dividend payment. Since the risk level of the instrument is higher, it is compensated by making payment of high rate of dividend. Nostro account is a Latin word meaning ‘our account with you’. A bank’s account with his correspondent banker abroad, ordinarily in the home currency of that country, e.g., an Indian bank having a Swiss franc account with a bank in Switzerland or in any other international financial centre. Notice money is a transaction where the participants will take to receive or deliver for more than two days but generally for a maximum of fourteen days. Objectives are broad and long-range desired state or position in future. Obligors are the borrowers of the original loan. Off-balance sheet financing is a sort of funding or financing done in such a way that will not come under the legal provisions or accounting conventions to show it in the balance sheet. This practice is resorted to by the highly-geared companies, whose debt-equity ratio is abnormal. Offer for sale – A company sells its shares already in issue en block to an issuing house, which makes a reissue to the public acting as principal. Offer for sale is the sale of existing shares by promoters to the investing public. Offer of shares – This measure involves partial sale of equity ownership at a fixed price by a book-building process. Official quotation – The prices at which the securities are listed on a recognized stock exchange. Oil bonds – To compensate the subsidy losses of public sector oil marketing companies, oil bonds are issued by the government to such companies in lieu of cash, mature after five to seven years. Old securities are securities which have been issued already and listed on a stock exchange. On-line stock trading – The buying and selling of securities is made through computer screens based trading system provided by the recognized stock exchange, using satellite communications and the network is accessible from different locations all over the country. Open account trade credit is the credit available to the buyer without any legal evidence or instrument and appears in the balance sheet of the buyer as ‘sundry creditors’.

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Financial Management - Key Terms

Open market is the total number of open contracts on a security, including the number of future contracts or options contracts that have not been exercised, expired or fulfilled by delivery. It is also called as ‘open interest’. Operating activities are the principal revenue producing activities of the enterprise. These transactions and events will be taken into consideration of net profit or loss. Operating budgets relate to physical activities/operations such as sales, production, and so on. Operating cashflows are cashflows generated by the operations of the firm. Operating cashflows are directly related to production and sale of the firm’s products/ services. Operating cost is the fixed cost of placing and receiving an inventory order. Operating cycle implies the continuing flow from cash to suppliers, to inventory to accounts receivable and back into cash. Operating exposure has impact on firm’s future operating revenue, costs and cash flows. Operating lease generally arises out of a sale transaction. Usually the manufacturer supplies the asset, and allows the purchaser to keep the asset on lease basis until the full purchase price is paid in instalments. Operating leases are for a time shorter than the economic life of the asset; generally the payments over the term of the lease are less than the lessor’s initial cost of the leased asset. Operating leverage is caused due to fixed operating expenses in a firm. Operating leverage refers to the existence of fixed cost element in total cost structure of a firm and its impact on firm’s ability. It is expressed as Contribution/EBIT. A high operating leverage indicates a larger proportion of fixed costs causing low net profit and the EBIT will tend to vary more with sales. Operating ratios are the ratios of all operating expenses to sales. For example, material cost ratio, labour cost ratio, factory overhead ratio, etc. Operating risk is risk of not being able to cover fixed operating costs. Operational cashflows are the cashflows relating to normal business operations like cash receipts from sales, payment for supplies, payment for operational expenses, etc. Opportunity cost of capital is the expected rate of return that equates to the market rate of interest for investments of a similar risk profile. Optimal conversion size/amount is the cost of minimising quantity in which to convert marketable securities to cash or cash to marketable securities. Optimal investment is achieved at a point where the indifference curve of an investor is at a tangent to the efficient frontier, indicating acceptable risk level in order to achieve desired return. Investors prefer to portfolios on the efficient frontier with least possible risk to earn expected rate of return. Optimum capital structure is the capital structure at which the weighted average cost of capital is minimum and thereby maximum value of the firm. Optimum capital structure is the combination of debt and equity that leads to the maximization of the value of the firm. The company’s long-term survival and growth depends upon design of option capital structure.

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Financial Management - Key Terms

Optimum dividend policy – A company should try to set an optimum dividend policy which should consider both stock market price of share and availability of sufficient funds for meeting the requirements of expansion and growth of the firm. Option contract gives the holder of the contract the option to buy or sell the asset at a specified price on or before a specific date in future. Option equivalent involves purchase of equity shares partially through debt. Option is a contract that confers to its holder/owner the right but not the obligation to buy/sell a specified security at a specified price on/before a given date. Option is an instrument that provides its holders with an opportunity to purchase/sell a specified asset at a stated price on or before a set expiration date. Option is the right, but not the obligation, buy or sell something at a stated date at a stated price. Option premium is sold by the writer to the holder in return for a payment is called ‘premium’. Option premium is the price that the option buyer pays to the option seller. Option tender bonds are issued with put option which gives the bond holder the right to sell back their bonds to the issues normally at par. Option/option contract is a contract that gives the holder the right but not the obligation to buy/sell an asset/security. Orgler’s model is a model that provides for integration of cash management with production and other aspects of the firm. Original/Initial investment (outlay) is the relevant cash outflow for a proposed project at time zero (t = 0). Origination is the work of investigation and analysis and processing of new issue proposals. Originator is the entity on whose books the assets to be securitised exist. Over capitalization is a situation where excessive investments are made in current assets than required which lead to inefficiency in working capital management. Over trading is a situation where a firm attempts to increase its sales level without having a support of adequate working capital. Par (face) value is a value arbitrarily placed on the shares. Par value is the value on the face of the bond. Pareto analysis – In pareto analysis, the total items of inventory are classified using 80:20 rule. The rule says 20% items represents 80% of value and management should concentrate on those 20% items, leaving the 80% items to lose control. Participation is a feature that provides for dividend payments based on certain formula allowing preference shareholders to participate with ordinary shareholders in the receipt of dividends beyond a specified amount. Participatory notes (PNs) are indirect ways through which unregistered overseas investors – who cannot directly participate in the stock market in India – invest in Indian stock market. PNs are derivative products with securities as underlying. PNs are generally issued overseas by the FII sub-accounts or India based foreign brokers.

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Financial Management - Key Terms

Passive risk management is a strategy in which the corporate can choose to cover selectively and progressively on its view of individual currency movements and it may leave some portion of their forex exposures open with the aim of capitalizing on certain anticipated market movements. Payback (period) method is the exact amount of time required for a firm to recover its initial investment in a project as calculated from cash inflows. Payback period – Under this method accumulation of cashflows is made year after year until it meets the initial capital outlay, to identify the recovery time of the capital amount invested. In periods of capital rationing, the project with earliest payback period would be given preference over the others. Payment float refers to the cheques issued but not paid by the bank at any particular time. Payoffs are the likely profit/loss that should accrue to the market participant with change in the price of the underlying asset. Pecking order theory does not suggest any particular target or optimal capital structure and firms prefer internal to external financing. If the firms do require external financing they will issue the safest security first in the order of term loans, unsecured debentures, secured debentures, convertible debentures, preference shares, convertible preference shares and finally in the form of new equity shares. Pecking-order theory enumerates the preferred order of raising finance normally followed by corporate. Pension fund has the task of making benefit payments to participants who have crossed their active income earning career. The pension fund management has to decide periodically how to distribute the investments over different asset classes in order to meet all obligations. This decision process is called ‘asset liability management’. Percentage sales method – Under this method, the level of current assets and current liabilities are determined by establishing its past trend in relation to sales. Perfect information will foretell the outcome with absolute certainty and enable the decision maker to select the right decision with confidence. Perfect negative correlation describes two negatives correlated series that have a correlation coefficient of (-) 1. Performance analysis is an analysis done for the project as a whole and for individual part of the project, as regards time and cost, whether it is as per schedule or not. Performance plans compensate management on the basis of proven performance. Performance shares are given to management for meeting the stated performance goals. Permanent (fixed) working capital is a certain minimum level of working capital on a continuous and uninterrupted basis. Permanent needs imply financing needs for fixed assets plus the permanent portion of current assets which remain unchanged over the year. Permanent working capital refers to the need for minimum level of working capital to carry the firm’s business irrespective of change in level of sales or production. Such minimum level of working capital is also called as permanent working capital, fixed working capital and regular working capital. Perpetuity is an annuity with an indefinite life, making continuous annual payments.

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Financial Management - Key Terms

Personal taxation – A business organization must consider the tax consequences for the investors in company’s shares, debentures and bonds in order to attract investors to the firm’s securities. Persons acting in concert are a person who co-operates for substantial acquisition of shares/voting rights to gain control over the target company. Placement of securities is the sale of unquoted securities. Placing – The securities to be issued are placed by an intermediary with number of investors and institutions like mutual funds, pension funds, insurance companies, banks, financial institutions, etc., without the expense of public issue. Plain vanilla is a simple derivative with standard features is termed as plain vanilla. Planning – Planning involves specifications of basic objectives and fundamental policies. Playing the float – The company can make use of the payment float is called ‘playing the float’. Pledge is the use of goods as security/collateral to obtain a short-term loan. Political risk refers to the possibility of facing unwanted consequences due to change in political relations between two countries and that may adversely affect the value of the firm. Political risk ranges from mild interference to complete confiscation of all assets of the MNC by the government in a foreign country. Portfolio is simply a collection or group of securities considered in total as a single investment unit. Portfolio M – Whatever the investment portfolio is constructed by investor, he will only be interested in one portfolio of purely of risk assets, which is called Portfolio M which is identified on the capital market line where it touches the efficient frontier. Portfolio management is the dynamic function of evaluating and revising the portfolio in terms of stated investor objectives. Portfolio risk is the covariance between the returns of the investments in the portfolio. Portfolio theory is concerned with the problem of making a selection of optimum investments in respect of particular investor, taking into account the anticipated returns and risks associated with them. Positive working capital represents the excess of current assets over current liabilities. Postal float is delay between the time when a payer mails a payment and the time when the payee receives it. Post-shipment finance is a loan or advance provided by an institution to an exporter of the goods from India from the date of shipment of goods to the date of realization of receivables. Precautionary motive is motive for holding cash/near-cash as a cushion to meet unexpected contingencies/demand for cash. Pre-emptive right (rights) is a legal right of existing shareholders to be offered by the company in the first opportunity to purchase additional equity shares in proportion to their current holdings.

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Financial Management - Key Terms

Preference dividend – The preference shareholders entitle for a fixed rate of dividend out of profits available for distribution. Preference shares – The holders of preference shares have preferential right in respect of assets when the company is winding-up and can get their stated dividend before declaration of any dividend to equity shareholders. The preference shareholders can’t get right to vote in the members meeting unless their rights get affected. Preferential issue is an issue of specified securities by a listed issuer to any select group/ group of persons on a private placement basis. Preferential issue of equity shares can be made to a select group of persons which is neither a rights issue nor a public issue. The shares issued under employee stock option plan are coming under this head. Premium is the amount by which a bond sells at a value higher than its par/face value. Present value interest factor for an annuity is the multiplier to calculate the present value of an annuity at a specified discount rate over a given period of time. Present value interest factor is the multiplier used to calculate at a specified discount rate the present value of an amount to be received in a future period. Present value is the current value of a future amount. The amount to be invested today at a given rate over a specified period to equal the future amount. Pre-shipment finance covers the credits extended to exporters prior to shipment of goods, which is meant for purchase of raw materials, processing of raw materials, packaging, transporting the goods meant for export, warehousing, etc. Price earning indicates the ratio of market price of an equity share to the earnings per share. It measures the number of times the earnings per share discounts the market price of equity. Price/Earnings (P/E) ratio measures the amount investors are willing to pay for each rupee of earnings; the higher the ratio, the larger the investors’ confidence in the firm’s future. Price/Earnings multiple approaches are a technique to compute value of shares multiplying expected earnings per share by the average price/earnings per share by the average price/earnings ratio for the industry. Price-earning method – The cost of equity capital is computed by taking the capitalised stream of future earnings per share. Primary dealer plays as an underwriter in the primary market and that of a market maker in the secondary market for the government instruments. Primary market – In primary market, the new issues of securities are available in the market and there is direct mobilization of funds from the savers, i.e., public. Principal refers to the amount of money on which interest is received. Private banking refers to the personalized service provided to elite customers as against mass retail banking. Private equity refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. It is a form of finance provided through negotiated deals for medium to long-term provided in return for equity stake in potentially high growth unquoted companies or closely held companies.

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Financial Management - Key Terms

Private placement is an offer to less than 50 persons. Privatization is just opposite to nationalization. Under process of privatization, government sells their equity shares to employees, mutual funds, individual persons and organizations. Disinvestment always forms part of privatization. Probability distribution is a model that relates probabilities to the associated outcome. Probability is the chance that a given outcome will occur. Probability is the measure of likelihood of such an event happening as scheduled, planned logically. Problem solving is described as any goal-directed activity that must overcome some type of barrier to accomplish the goal. Profit maximization – The true objective of the firm is maximization of profits. The attainment of objectives like survival, security or the maintenance of liquid assets is possible only when the firm earns profit. Profitability index measures the present value of returns per rupee invested. Profitability ratios help in assessing the adequacy of profits earned by the company and indicate whether profitability is declining or increasing. Profitability ratios are measured with reference to sales, capital employed, total assets employed, shareholders’ funds, etc. Profitability refers to a situation in terms of efficiency in utilization of resources to achieve profit maximization for the owners. Project appraisals are the process by which a financial institution makes an independent and objective assessment of the various aspects of the investment proposition for arriving at a financing decision. The project appraisal is done from four angles, viz., financial feasibility, technical feasibility, economic feasibility, managerial competence. Project beta indicates the business risk of the project used in finding the required rate of return of the project. Project execution plan refers to that exercise of matching the project hardware and software with the executing agencies through a viable work system. Project failure – The projects may be failed at the time of implementation stage itself due to substantial time and cost overrun, changes in technology, wrongful estimates, failure to obtain permission, etc. Project incentives – The location of the industry and setting up of a project are influenced by state incentives, and tax considerations like incentives offered for 100% EOU, small scale units, cash subsidy for setting of project in backward areas, sales tax deferment, subsidy in electricity charges, rent free land and building, etc. Project location refers to the broad area for setting up the industry. Project management information systems (PMIS) is structured based on the needs of managerial planning, organization and control. Project management is essentially involved in executing the project and thereby accomplishes the goals of the organization in time. Project procedure manual is required to coordinate the various sub-systems in the project management by thorough understanding of various agencies in project implementation. Project site refers to a specific piece of land where the project would be set up.

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Financial Management - Key Terms

Project visibility – The project activities starts prior to zero date and time spent on the project planning and getting the necessary clearances from the government and financial institutions. During this period the project cannot be seen by the public. A project can be seen by the people only at the end of its implementation stage. Promoter is a person or group of persons who are instrumental in formation of the company, who enable the company to start its commercial operations by bringing in the necessary funds required for the concern. Promoters contribution – An entrepreneur who promotes the project will also participate in the scheme of finance by bringing certain portion of the project cost, called ‘promoters contribution’. Proportionate voting is the system under which each share is allotted a number of votes equal to the number of directors to be elected and votes can be given to any director. Proprietary ratio indicates the extent to which assets are financed by owners’ funds. Propriety audit is an examination of actions and decisions to find out whether they are in public interest and meet the standards of proper conduct and to examine whether they is any leakage or wastage of public funds by mistake or fraud. Prospectus – A public company can raise its capital by issue of prospectus. Through prospectus a company invites offers from the members of the public to subscribe its shares and debentures. Public issue are securities that are offered to the general public directly at a stated price. Public sector enterprise is a business undertaking owned, controlled and managed by the State, on behalf of and for the benefit of the public at large with an objective to achieve the strong industrial base and to provide infrastructure for the development of the economy of the State. Purchasing power parity states that relative inflation rates of different countries will have impact on their currency exchange rates. The expected difference in inflation rate would be approximate to the expected change in exchange rate. Purchasing power parity theory is a theory according to which goods of equal value in different countries are equated through an exchange rate. Purchasing power risk – The investors’ expectations will change with the changes in levels of purchasing power is referred to as risk due to inflation. Put option entitles the holder the right but not the obligation to sell securities. Put option gives the buyer the right but not the obligation, to sell a given quantity of the underlying asset at a given price on or before a given date. Put option in debenture gives the right to investor to demand back the money earlier to the redemption date at a predetermined price (strike price) within a specified period. Put option is an option to sell a given number of shares on or before a specified future date at a stated price. Put premium is the compensation received by the put option writer from the put option buyer.

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Financial Management - Key Terms

Put-call ratio represents the trading volume of put options to call options. A raise in put option volumes is an indicator of bearish mood in the market. The increase in call option volumes is an indicator of bullish sentiment. Qualified institutional buyers (QIBs) are those institutional investors who are registered with SEBI or QIBs who are eligible to invest in primary issue through preferential allotment are qualified institutional buyers. Qualified institutional placement (QIP) – The SEBI has now permitted the listed companies to raise funds from the domestic market by making private placement of securities with Qualified Institutional Buyers (QIBs). The process will be called Qualified Institutional Placement (QIP) and the securities so issued would constitute the fully paid-up capital of the company. Qualified institutional placement (QIP) is the allotment of shares/CDIs/Warrants and other convertible securities by a listed issuer to QIBs on private placement basis. Qualitative analysis – The qualitative fundamentals involve the nature of industry, investment environment, factors relating to specific industry, competitiveness, quality of management, corporate governance, etc. Quality refers to the degree of certainty with which benefits can be expected. Quantitative analysis is based on the numerical terms and factors relating to the company like operational efficiency, profitability, capital structure, dividend policy, etc., which can be obtained from the financial statements. Quick assets include all current assets except inventories. Random walk hypothesis – Under this theory, it is assumed that stock market price can never be predicted because they are not as a result of any underlying factors but are mere statistical ups and downs. Range is a measure of risk which is found by subtracting the pessimistic (worst) outcome from the optimistic (best) outcome. Rating symbol is a symbolic expression of opinion of the rating agency regarding the investment/credit quality/grade of the debt instrument/obligation. Ratio analysis is a systematic use of ratios to interpret/assess the performance and status of the firm. Ratio range forward – In ratio range forwards the buyer gets full protection on the downside, but shares the profits with the writer in a predetermined ratio if the currency moves above a stipulated level. Real cash flows – In ascertaining the real cashflows, money cashflows are adjusted in the real terms of the purchasing power of money considering the rate of inflation into account. Real cash flows are cash flows discounted/deflated to reflect effect of inflation on nominal cash flows. Real cost of capital is cost of capital adjusted for inflation effect. Real interest rate is the rate of interest adjusted for inflation. Real options are opportunities to respond to changing market conditions and influence the outcomes of a project.

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Financial Management - Key Terms

Receivables arise from sale of goods and services on credit basis. Receivable balance as shown in the balance sheet of a company relates to sales made on credit for which payment has not yet received. Receiving and paying agent is one who collects the payment due from the obligors and passes it on to the SPV. Recognizability – The uncertainty in the happening of an event can sometimes be recognizable in advance. Record date – The dividend payment will be made to the members whose name appear in the Register of Members on a particular date is called ‘record date’. Record date is the specified date set by the Directors on which all persons whose names are recorded as shareholders receive the declared dividend. Regression analysis is a statistical technique used in establishing of trend relation in between sales and working capital, used for estimation for working capital needs of the forthcoming period. Related activity target (RAT) schedule is maintained in ‘S’ curve form and will have all important activities and all milestones. Relaxed policy allows sufficient cushion for the fluctuations in funds requirement for financing various items of working capital. Relaxed policy involves large amounts of cash/cash-equivalents, receivables and inventory. Relevant cash flow is the incremental after-tax cash outflow (investment) and resulting subsequent inflows associated with a proposed capital expenditure. Rematerialization is the conversion of dematerialized holdings back into physical form. Reorder point is the point at which to order inventory expressed equationally as: lead time in days × daily usage. Replacement project – The existing equipment, which is deteriorated due to obsolescence and its economic life is completed, should be replaced with a new machine, which may be more efficient than old machine. Replacement value is the cost of acquisition of a new asset of equal utility. Repo – A ready forward transaction is usually known as ‘repo’, allows a holder of securities to sell with a commitment to repurchase them at a predetermined price and date. Repurchase (repo) agreements are an agreement whereby a bank sells securities and agrees to buy them back at a specific price and time. Repurchase agreements are simply called as ‘repos’ which arises when one party sells a security to another party with an agreement to buy it back at a specified price. Repos are active between the commercial banks. Required rate of return reflects an investor demands as compensation for postponing consumption and assuming risk. It depends on risk-free return and premium required for compensating business and financial risks attached with the investment. Required rate/return is a specified return required by investors for a given level of risk. Residual dividend policy pays out only excess cash.

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Financial Management - Key Terms

Residual risks – All risks can never be fully avoided or mitigated simply because of financial and practical limitations. Therefore, all organizations have to accept some level of residual risks. Resistance level is a price level at which stock or the market rises and then falls from repeatedly. Resource levelling is the usage of resources during the project duration with minimum variation in source requirements without extending the project completion time. Restricted policy involves the rigid estimation of working capital to the requirements of the firm and then forcing it to adhere to the estimate. Restrictive covenants are contractual clauses in loan agreements that place certain operating and financial constraints on the borrower. Restrictive covenants in the long-term loan agreement are incorporated to protect the interest of the financial institution. Retail banking – A retail banker provides banking services for individuals. It includes deposit taking, home finance, automobile finance, consumer finance, consumer durable finance, credit card services, retail mutual fund, retail insurance, investment management services, etc. Retained earnings are the profits ploughed back and retained with the company, without distributing them in the form of dividends. Return is the actual income received plus any change in market price of an asset/investment. Return on equity = Net profit × Total assets turnover ratio × Total assets to Networth. Return on investments (ROI) measures the overall effectiveness of management in generating profits with its available assets. Return on ordinary shareholders’ equity measures the return on the total equity funds of ordinary shareholders. Return on shareholders’ equity measures the return on the owners (both preference and equity shareholders) investment in the firm. Reverse asset allocation – Some investors prefer to enhance their exposure to alpha generators and it constitutes the core portfolio instead the satellite portfolio. Stocks and bonds are added to this core to balance overall portfolio risk. Reverse capital budgeting is the capital budgeting in which cash inflows on account of demerger occur at time zero and the cash outflows are in terms of sacrifice associated with the transfer of the division/asset. Reverse merger takes place when a profit making company merge into a loss making company. Reverse merger may be motivated for exploiting tax benefits of carry forward of accumulated losses and unabsorbed depreciation of loss making company by a profit making company. Reverse mortgage is a new avenue for cash poor but asset rich senior citizens to mortgage their equity in residential property to meet their increased living expenditure. Reverse repo – In a reverse repo securities are bought with a commitment to resell them to the original holder and a predetermined price and date.

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Financial Management - Key Terms

Reverse stock split reduces the number of outstanding shares. Reverse synergy implies that the assets/units which are demerged are of more worth to other firms than the firm itself. Right – The ‘right’ is an entitlement to subscribe for rights issue. Normally the right is given to the shareholders who are the registered members. It can also be purchased in the market, if the potential investor perceives that there is a gain over purchase price of a right. Rights issue – The existing companies raise additional funds by issue of shares to the existing shareholders in proportion to their existing holding, through offer document. Rights issue is the sale of securities to the existing shareholders. Risk adjusted discount rate is a method to incorporate risk in the discount rate employed in computing the present values. Risk adjusted rate of return is obtained by adding the risk premium to risk free rate of return. The NPV is ascertained by taking a greater discount rate according to the risk level of the project. Risk analysis is the method of listing risks and grouping them into logical commonalities for purposes of control. Risk aversion, explained under Markowitz Mean Variance Model suggests that as between investments with equal expected returns, the investment with smaller risk would be preferred. Risk avoidance includes deliberate attempt on the part of the person taking risk decision not to perform an activity or not to accept a proposal, which is risk prone. Risk aware culture – The management must keeping view the possibility of risk and uncertainty in preparation of project estimates as well as in decision making for successful project completion. Risk awareness culture is to be developed at all levels of project management. Risk free security has zero variance. Risk handling – In ideal risk management, a prioritization process is followed whereby risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability loss are handled later. Risk hedging is a systematic process reducing risk associated with an investment proposal or in some other assignments where risk is inevitable, i.e., the risk of such nature that it cannot be avoided altogether. Risk is defined as a situation, where there is possibility of the expected event not happening as planned, partially or fully, leading to frustration of the objective with which the event was planned. Therefore, risk means a negative variance from plan, adversely impacting the investment. Risk is the chance that actual outcomes may differ from those expected. Risk is the future happening can be assumed under probability and the likelihood of future outcomes can be quantified is called ‘risk’. The risk of an asset is expressed in terms of standard deviation of return. Risk is the possibility of loss arising on account of under-utilisation or technological obsolescence of the equipment.

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Financial Management - Key Terms

Risk is the variability in the actual returns in relation to the estimated returns. Risk is the variability of actual return from the expected return associated with a given asset. Risk management is the process of measuring or assessing risk and developing strategies to manage it. Risk reduction involves methods that reduce severity of the loss arising from risk consequences. Risk retention involves accepting the loss when it occurs by taking risky proposal or risky assignment where there are no other alternatives to avoid risks. Risk transfer means causing another party to accept the risk, typically by contract. It involves a process of shifting risk responsibility on others. Insurance is one type of risk transfer, which is widely used in common parlance. Risk-averters want to avoid risk. Round tripping is the alleged practice of Indian black money finding its way back into Indian stock exchanges through FII route. Safety net is a scheme under which a person or a company (generally a finance company) undertakes to buy shares issued and allotted in a new issue from the allottees at a stipulated price if the market price of share falls below the issue price, when shares are issued at a huge premium. Safety stock implies extra inventories that can be drawn down when actual lead time and/or usage rates are greater than expected. Sale and lease back – Under this, the lessee first purchases the equipment and then sell it to the leasing company, which in turn leases it to the same purchaser/lessee. This form of finance is used to improve the liquidity position of the lessee. Sale-lease back is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making fixed periodic payments for its use. Sales aid leasing – A leasing company will enter into an agreement with the seller, usually manufacturer of the equipment, to market the latter’s product through its leasing operations. The leasing company will also get commission for such sales, which add-up to its profits. Sales creation implies increased sales on account of proposed foreign investment. Satellite portfolio – Most investors prefer equity for their core portfolio, adding bonds to reduce volatility and downside risk. Schedules are statements which explain the items given in Income statement and Balance sheet and forming part of financial statements. Scrip dividends – A company with huge accumulated reserves will distribute the earnings in the form of bonus shares which are called as ‘scrip dividends’. A listed company proposing to issue bonus shares shall comply with the guidelines issued SEBI. Scripless trading is a method in which the settlement of transactions takes place via book entry instead of physical exchange and delivery of securities certificates. Seasonal portion implies the financing requirements for temporary current assets which vary over the year.

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Financial Management - Key Terms

Secondary market is a place where sale and purchase transactions take place on securities once issued and outstanding. It is also called as ‘stock market’. Secured debenture carries the security on the company’s properties which can be realized in the event the debentures are not redeemed on the specified period. Secured loan is a loan that has specific assets pledged as collateral. Secured premium note – These instruments carries with a detachable warrant which can be sold in the market. The warrant holder can get the specified equity shares at a future date. Securities analysis – The entire process of estimating return and risk for individual securities is known as ‘securities analysis’. Securitization is the process of pooling and repackaging of homogenous illiquid financial assets, such as residential mortgage, into marketable securities that can be sold to investors. Securitization means acquisition of financial assets by any Securitization Company or Reconstruction Company under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Security market line (SML) is the expression of expected return of a security increases linearly with and risk and slopes upwards with an intercept at the risk-free return securities and passes through the market portfolio. Security market line is a graphic depiction of CAPM and describes the market price of risk in capital markets. Seed capital refers to investing in the research and development of an initial business concept. Sell-off – A company will resort to sell a part of the organization to a third party, with a view to concentrate on core business activities, by selling-off non-core activities. It is also called as ‘hive-off’. Semi-annual compounding means two compounding periods within a year. Sensitivity analysis is a behavioural approach that uses a number of possible values for a given variable to assess its impact on a firm’s returns. Sensitivity analysis is a behavioural approach to assess risk using a number of possible return estimates to obtain a sense of the variability among outcomes. Sensitivity refers to the degree of impact on an event to influences and changes occurring in the planning and scheduling of the event and its components. Share premium – When a company issues shares above the par or nominal value of the share, the excess amount so collected is called ‘share premium’. Shareholder value analysis refers to economic value created for shareholders as measured by share price performance and flow of funds. While making decisions, managers should identify the value drivers which will lead to increase in shareholders’ value. Shares buyback is the method of financial engineering which enables a company to go back to the holders of its shares and offer to purchase the shares held by them. Short selling is the sale of a security that is not owned by the seller, but with a promise to deliver the same. The short seller presumes the price of the security to go down, so that he will be able to buy the stock at a lower price than the price he sold short.

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Financial Management - Key Terms

Short-term analysis is done to determine the liquidity position and short-term solvency of the firm. It relates to efficiency of working capital management and profitability of current operations. Sick unit incurs cash losses and fails to generate internal surplus on a continuing basis. The causes for sickness of an industrial unit may arise in planning stage, implementation stage or commercial production stage. Signalling hypothesis conveys/signals optimistic future prospects about the issuer. Simple interest is calculated only on original principal amount till it is repaid back to the lender. Simulation is a statistically based behavioural approach used in capital budgeting to get a feel for risk by applying predetermined probability distributions and random numbers to estimate risky outcomes. Sinking fund is a form of specific reserve used for the redemption of long-term debt or replacement of capital assets, by setting aside certain amount of money every year for a specified time by investing the same in outside marketable securities which can be sold at the time of maturity of debt or replacement of asset is needed. Size-disparity arises when the initial investment in mutually exclusive projects is different. Slump sale – In slump sale, a company sells or disposes the whole or substantially the whole of the undertaking for a predetermined lumpsum amount as sale consideration without fixing the value of individual assets and liabilities. Social Cost Benefit Analysis (SCBA) is a systematic evaluation of an organization’s social performance by making an analysis of social costs and social benefits of a project in terms of real costs of inputs and real costs of output, considering the social welfare and well-being of the society. Social desirability of a project is evaluated from the angle of employment potential, foreign exchange earnings, social costs and social benefits, output in relation to capital employed, value addition per unit of capital employed. Social risk refers to the possibilities of loss due to factors such as religious fanaticism, ethnic polarization, and dissatisfaction among the people as a result of wide disparity in income distribution or regionalism. Soil and topography – The soil strength of a particular area where the project is to be located becomes an important factor for consideration if project envisages heavy machinery. Topography means formation of soil and its contour. The project cost of an unfavourable soil and topography will be high and also cause delays in proper implementation. Source of fund – A decrease in an asset or an increase in liability over the year result in source of fund. Sovereign Wealth Funds (SWFs) are Government investment funds, funded by foreign currency reserves but managed separately from currency reserves. Basically, they are pools of money, government investment for profit. Special Economic Zone (SEZ) is a specially demarcated area and special policies and laws are framed for it, which are not applicable to other areas of the country, with a primary focus on the promotion of export oriented production in the country by extending duty exemption on goods manufactured in SEZ.

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Financial Management - Key Terms

Special Purpose Vehicle (SPV) is the entity which would typically buy the assets to be securitised from the originator. Special purpose vehicle is a separate company that will be set up as a shell company which don’t involve in business other than procuring the funds and passes it on to the parent company. Specified date is the date with reference to which the shareholders to whom letter of offer would be sent are determined. Speculative company is one whose assets not only involve great risk but also possess a possibility of great returns. Speculative motive is a motive for holding cash/near-cash to quickly take advantage of opportunities typically outside the normal course of business. Speculative stock possesses a high probability of low or negative rates of return and a low probability of normal or high rates of return. Speculators are those classes of investors who willingly take price risks to profit from price changes in underlying. Spin-off is a method for demerger through creation of a separate firm. Split-up is a method for demerger through breaking-up of the firm in a series of spin-offs. Spontaneous finance is the finance naturally arising in the course of business like trade creditors, credit from employees, etc. Spot contract – In spot contract, the sale and purchase of commodities or instruments take place immediately in exchange of a cash price. Such price is also termed as ‘spot price’. Spot rate is the price at which currencies can be bought and sold in the spot exchange market for immediate delivery. Spot rate is the rate of exchange of the day on which the transaction has taken place and of the days the transaction is executed. Spread – The difference between the bid price and offer price is called ‘spread’. This represents the margin of foreign exchange dealer. Spread is the difference between the ask price (sale price) and the bid price (purchase price). Stable rupee plus extra dividend is a policy based on paying a fixed dividend to shareholders supplemented by an additional dividend when earnings warrant it. Stakeholders include groups such as employees, customers, suppliers, creditors, owners and others who have a direct link to the firm. Standard deviation is the square root of the mean of the squared deviation; the deviation being the difference between an outcome and the expected mean value of all outcomes. Standard deviation measures the dispersion around the expected value. Starting date is the date on which credit period or discount period starts. It could begin from the date of goods despatch, date of invoice or some other date accepted by the parties to sale. Start-up is a stage when product/service is commercialised for the first time in association with venture capital institutions.

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Financial Management - Key Terms

State Government securities are issued by the State Government to meet their long-term funding needs for a period of 5 to 7 years. The target markets for these securities are insurance companies and mutual funds. Statement of retained earnings – The balance shown by the Income statement is transferred to the Balance sheet through this statement after making necessary appropriations like dividends, transfer to reserves, etc. Static trade-off theory says that the value of firm depends on the tax savings on interest payments which induces the firm to borrow to the margin where the present value of interest tax shields is just offset by the value of loss to agency costs of debt and the possibility of financial distress. Step-up debenture – The terms of issue of stepped-up debenture contains that instead of making conversion at one go at the end of the tenure, it has designed the instrument in such a way that the equity component is augmented gradually. Stock broker is a member of a recognized stock exchange who involve in carrying of activities of buying, selling or dealing in securities on behalf of clients and charge brokerage or commission for his services. Stock control is defined as the systematic regulation of stock level by concentrating in the areas of ordering, purchase, receipt, storage and issues. Stock exchange is an organized secondary market where securities like shares, debentures issued by corporate, Government and Quasi Government are purchased and sold systematically with trading rules. Stock futures is a future contract that gives its owner the right/obligation to buy-sell the stocks (shares). Stock index futures are a futures contract where the underlying variable is a stock index such as BSE Sensex, S & P, CNX, Nifty, etc. The value of Stock Index Future derives its value from the stock index value. Stock Index Futures are cash settled all over the world. Stock index represents change in the value of a set of stocks, which constitute the index, over the base year. Any index is an average of its constituents. The stock market index captures the behaviour of overall market. Stock market is a place where the savers and users of their funds come together in the market for finance, and the rules of supply and demand are applicable and also subject to government regulation. Stock options allow management to purchase shares at a special/ concessional price. Stock split is a method commonly used to lower the market price of shares by increasing the number of shares belonging to each shareholder. Stock split is the division of a share into two or more parts, Stock split adds no value but it increases the number of shares in the ratio of the split. Stock turnover ratio indicates the number of times the average stock is held as compared to the annual consumption of raw materials. Stock-out implies shortage of enough to meet the demand for the product. Straight debenture value is the price at which a convertible bond would sell in the market without the conversion feature.

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Financial Management - Key Terms

Straight preference shares value/price is the price at which a preference share would sell without the redemption/call feature. Strategic alliance – In strategic alliance, two or more firms that unite to pursue a set of agreed upon goals; remain independent subsequent to the formation of an alliance. The common objectives would be reduction of cost, technology sharing, product development, market access, etc. Strategic financial planning involves financial planning, financial forecasting, provision of finance and formulation of finance policies which should lead the firm’s survival and success and to counter the uncertain and imperfect market conditions and highly competitive business environment. Strategic planning – The aim of strategic planning is to create a viable link between the organisation’s objectives and resources and its environmental opportunities. Strategic sale – The strategic sale transaction of a government company will consist of two elements (a) transfer of a block of shares to a strategic partner, and (b) transfer of management control to the strategic partner. Strategies represent specific course of action to achieve goals. Strategy is a declaration of intent. It defines what the organization wants to go to fulfil its purpose and to achieve its mission. It provides the framework for guiding choices which determine the organization’s nature and direction. Striking price is the price at which the holder of a call option can buy (or the holder of put option can sell) a specified amount of shares at any time prior to the expiration date. STRIPS are the process of separating the interest and principal portions of a security, which may then be sold separately in secondary market. Structural health ratios include current assets to total net assets, composition of current assets, debtors’ turnover ratio, debtors’ collection period, bad debts to sales, creditors payment period, etc. Structural leverage is expressed in traditional form as debt-equity ratio. A high ratio indicates large outside borrowings and it enables to have control over the firm’s management and the firm carries higher level of financial risk. Subordinated debenture – The holders of subordinated debentures will get their money only after the other debts are paid off during insolvency. Subscribed share capital is the number of shares (capital) outstanding. Sunk costs are cash outflows that have already been made (i.e., past outlays) and therefore have no effect on the cash flows relevant to a current decision. Support level is the price at which buyers constantly seem to come forward to prevent the share price dropping any lower. Sustainable Growth Rate (SGR) is the maximum sales that can be achieved in a year based on target operating debt and dividend payout. It can be achieved by using both internal accruals as well as external debt without increasing the financial leverage. Sustainable growth rate measures maximum rate of growth using both internal and external sources of financing without increasing its financial leverage (debt-equity ratio).

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Financial Management - Key Terms

Swap is an agreement between two or more parties to exchange and stream of future cash flow with another stream of cash flow with different characteristics. Swaps may be currency swaps or interest swaps. Swap rate is the difference between forward rate and spot rate. Sweat equity shares – A company can issue sweat equity shares to its employees or directors at discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value addition, etc. SWOT analysis is the conduct of a detailed study about the strengths, weaknesses, opportunities and threats of the existing business and proposed project. Synchronized inflation is a situation where costs and revenues rise at the same rate. Synergy – If the resource of one company is capable of merging with the resources of another company effortlessly, the combined effect will result in increase in the merged entity which is greater than the sum of individual companies. Synergy results from complementary activities. Systematic risk implies the overall market risk that affects all securities and cannot be diversified away. Systematic risk refers to that part of total risk which causes the movement in individual stock price due to changes in general stock market index. Systematic risk arises out of external and uncontrollable factors. Tad differentials are the different rates of taxes applicable to dividend and capital gains. Takeout financing refers to few banks joining hands in a manner of consortium and taking over the loan portfolio in turns. Takeout is the sale of equity stake of a VCI to a new investor including another VCF. Takeover – In takeover, the shares carrying voting rights of a target company are acquired with a view to gain control over the assets and management of the target company. Takeover by reverse bid – Normally, a large company takes over a small company. But when a small company acquires a big company, in takeover mode, such situation is called ‘takeover by reverse bid’. Takeover implies acquisition of controlling interest in a company by another company/ group. Takeover is a business strategy whereby a person acquires control over the other company – either directly by acquiring assets or indirectly by controlling management. Task force organization is created by drawing personnel from various functional departments and putting them under the Project Manager. The Project Manager is delegated with proper authority and responsibility as regards the project. Tax effects – The lessee can claim full amount of annual lease payments and maintenance expense of the asset as a deductible expense and the lessor is entitled to claim the depreciation allowance on the leased asset. Tax planner – The payment of corporate taxes involves cash outflows and will reduce the wealth available to the shareholders. One of the functions of a Finance Manager is to act as a Tax planner of the organization and to minimize the cash outflows in the form of taxes.

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Financial Management - Key Terms

Tax shield – The interest payable on debt is treated as an expense and it reduces taxable profit. The tax savings due to interest charge is considered as tax shield and ultimately reduces the cost of debt. Taxonomy of project – The location, type, technology, size, scope and speed of a project are normally the factors which determine the effort needed in executing a project. Technical analysis – The underlying assumption of technical analysis is that price of a stock depends on supply and demand in the market place. It has little co-relation with its intrinsic value. All financial data and market information of a given stock is already reflected in its market price. Supply and demand for stock are governed by numerous factors, both rational and irrational. Temporary (fluctuating/variable) working capital is the working capital needed to meet seasonal as well as unforeseen requirements. Temporary working capital is the extra working capital over and above the permanent working capital needed to support the changing business activities and levels of production and sales. It is also called as fluctuating working capital. Tender offer is a method to acquire control in another firm through bidding. Term (long-term) loan is a loan made by a bank/financial institution to a business having an initial maturity of more than 1 year. Term structure of interest rates describes the relationship between interest rates and loan maturities. Time value of an option is the difference between the option premium and the intrinsic value. Time value of an option represents the amount that options buyers are willing to pay, over and above the intrinsic value. The longer the time to expiration, the greater the time value of the option. Time value of money means that the value of a unit of money is different in different time periods. The value of money received today is different from the value of money received after sometime in the future and the value of money is time dependent due to inflation and interest effect on money. Time-cost trade-off – Sometimes, it may be necessary to complete the project before the due date, but for the time saving in implementation will result in additional cost. Time-disparity arises when the cash flow pattern of mutually exclusive projects is different. Timely action – The purpose of evaluating risk is to take timely action. Timing option is an option to postpone/accelerate/slow down a project in response to new information. Total capital employed (TCE) is the sum of shareholders’ funds as well as loan funds. But this does not include investments outside the business. Total cost is the sum of the ordering costs and carrying costs of inventory. Total fixed charge coverage ratios measure the firm’s ability to meet all fixed payment obligations.

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Financial Management - Key Terms

Total leverage may be defined as the potential use of fixed cost, both operating and financial, which indicates the effect of sales volume change on the EPS of the firm. It is expressed as Contribution/EBT. A higher combined leverage indicates the firm is subject to greater risk which includes both business risk and financial risk. Total variance of returns of a company is equal to the market related variance plus company’s specific variance. Tracking stock is a special type of stock issued by a publicly held company to track the value of one segment of that company. By issuing a tracking stock, the different segments of the company can be valued differently by the company. Trade credit is the credit extended by suppliers of goods and services in the normal course of business. Trade credit is the credit offered by a business firm to another business firm as a part of trade transaction. Trade credit period is the number of days until full payment of an account payable is required. Trade sales imply the sale of entire investee company to another company/third party. Trading on equity – The debt component should be used in the capital structure to enhance the return to the equity shareholders is called ‘trading on equity’. Trading on equity (leverage) is the use of borrowed funds in expectation of higher return to equity-holders. Trading range hypothesis would bring market price of shares within optimum range. Transaction costs are costs involved in selling securities by the shareholders. Transaction costs are the costs incurred in two ways: (a) costs incurred in raising new capital called flotation costs, and (b) costs incurred in selling the stocks in secondary market like brokerage, share registration expenses, stamp duty, etc. Transaction exposure involves gain/loss arising out of the various types of transactions that require settlement in a foreign currency. Transaction loans are provided by a banker for short period for a specific activity like financing for a civil contract work. When the customer receives payment, the transaction loan will be repaid by the customer. Transaction motive is a motive for holding cash/near cash to meet routine cash requirements to finance transaction in the normal course of business. Transaction risk arises due to fluctuations in the exchange rates when the normal trading transactions take place in the normal course of international trade. Translation exposure results from the need to translate foreign currency assets/liabilities into local currency at the time of finalising accounts. Translation risk – When the assets and liabilities of trading transactions are denominated into foreign currencies, then there may be risk of translation in such denomination into home currencies. Treasury bills are Indian government obligations issued on auction basis having maturities of 91-days and 364-days and virtually no risk.

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Financial Management - Key Terms

Treasury bills are instruments that finance the short-term requirements of the Government issued for periods ranging from 14 days to 364 days through regular auctions. Treasury management deals with efficient and skilled management of corporate finances and also deals with management of cash assets and its financial risk. The basic objective of treasury management is to maximize the availability of funds at any point of time and at desired place for investment and to minimize the situations of cash deficits. Trend can be defined as the direction in which the market is moving. Upward trend is the upward movement and downward trend is the downward movement of a stock’s price or of the market as measured by moving average. Trend ratios are index numbers of the movements of select major financial items in the financial statements to arrive at the conclusions for important changes. The trend ratios help in making horizontal analysis of comparative statements and reflect the behaviour of items over a period of time. Trend ratios involve evaluation of financial performance over a period of time using financial ratio analysis. Triangular arbitrage involves three foreign currencies involving three different foreign exchange markets. True and fair view – It is the application of accounting principles, concepts and standards normally result in financial statements that convey what is generally understood as a true and fair view of such information. Trust (bond) indenture is a complex and lengthy legal document stating the conditions under which a bond has been issued. Trustee is a bank/financial institution/insurance company/firm of attorneys that acts as the third party to a bond/debenture indenture to ensure that the issuer does not default on its contractual responsibilities to the bond/debentureholders. Turnaround management refers to the management measures which turn a sick unit back to a healthy one or those measures which reverse the deteriorating trends of performance indicators such as falling market share, falling sales, and reduction in profitability, worsening debt-equity ratio, etc. Turnkey contract – In this, a single contractor undertakes the responsibility for the entire work and completes it so that the owner merely turns the key and operates the plant. Uncertainty – It is known exactly what will happen in future and it cannot be quantified is called as ‘uncertainty’. Under capitalization is a situation where the company do not have funds sufficient to run its normal operations smoothly. Underpricing implies sale of shares at prices lower than the current market price. Underwriting is a form of guarantee that the new issues would be sold by eliminating the risk arising from uncertainty of public response. Underwriting is a special type of contract whereby responsibility is taken or guarantee is given to take-up the shares not subscribed for by the investing public.

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Financial Management - Key Terms

Universal banking – The universal banks are the one stop shops, which deal with a wide portfolio of financial products includes commercial banking, mutual funds, pension funds, insurance, underwriting of issues, securities issuance, etc. Unsystematic risk refers to that portion of risk which is caused due to factors unique or related to a firm or industry. It can be eliminated or reduced by diversification of portfolio. Upstream merger – When a firm acquires its upstream from it, it extends to the suppliers of raw materials. Utility function – When utility function is linear, decision maker maximizes expected utility by maximizing expected monetary value. The expected utility of a function is less than the utility of expected monetary value in case of a risk averse decision maker. Valuation is the process that links risk and return to determine the worth of an asset. Value added activities do increase the value of a product to the customers. Value engineering review is a systematic analysis and evaluation of the techniques and functions in the various spheres of an organization with a view to identify and/eliminate unnecessary functions and thereby reduction of cost which do not add value. Value maximization – The value maximization is modified that the maximization of shareholders wealth is possible with the maximization of market value of equity shares of the company. Value of bond – It is the P.V. of the expected future returns from the bond during the holding period. Value of right is determined by taking the difference of market price of share before rights issue. The rights issue subscription price is divided by the number of existing shares required to get a rights share. Variable costs fluctuate in direct proportion to activity/volume within relevant range for a given budget period. Variable growth model is a dividend valuation approach that allows for a change in the dividend growth rate. Variance analysis involves comparison of actual costs with budgeted costs to determine the variance. Venture capital institution (fund) is a financial intermediary between investors looking for high potential returns and entrepreneurs who need institutional capital as they are yet not ready to go to the public. Venture capital is a long-term commitment of investment in business which displays potential for significant growth and financial return. The venture capital investment is not done based on past record but on the credibility of the project’s success. The venture capitalist is not interested for regular return in the form of dividend but though capital gain. Venture leasing – In a venture leasing, the lessor provides both the assets as well as equity capital to the lessee, which minimizes the initial investment of the lessee in starting up its business. Vertical analysis is the study of quantitative relationship of one financial item to another based on financial statement on a particular period.

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Financial Management - Key Terms

Vertical consistency is the adherence to the same accounting policies, methods and practices adopted while preparing interrelated financial statements of the same date. Vertical merger – In vertical merger, two companies merged together who are involved in different stages of production, process or operation. Vertical merger is a merger that involves two or more stages of production/distribution that are usually separate. Virtual banking denotes the provision of banking and related services through extensive use of information technology without direct recourse to the bank by the customer. Vital, Essential, Desirable (VED) analysis classifies the inventory into Vital items, Essential items and Desirable items, to know the critical stock items. Volume-cost profit analysis shows the relationship among the various ingredients of profit planning, namely unit sale price, variable cost, sales volume, sales mix and fixed cost. Vostro account is a Latin word meaning ‘your account with us’. The local currency account of a foreign bank/branch, e.g., Indian rupee account is maintained by a bank in London with a bank in India. WACC approach – According to this traditional approach, the optimum capital structure is determined at a point where WACC is minimum and at this point the value of firm is maximized. Walter’s valuation model suggests that growth firms can increase share prices with lesser dividend payout. A declining firm can increase share price by higher dividend payout. In case of normal firms, the dividend payout does not affect its share value. Warrant is a long-term security attached to a bond or preferred stock, which gives the holder the right to buy a fixed number of company’s equity shares at a future specified period, under prescribed terms and conditions. Warrant is an instrument that gives its holder the right to purchase a certain number of shares at a specified price over a certain period of time. Warrant premium is the difference between the actual market value and theoretical value of a warrant. Wealth maximization objective of Financial Management asserts on maximization of shareholders wealth in the form of dividend and capital gains. Weather derivatives – The weather derivatives’ underlying asset is actually neither an asset nor an index but a measure of weather like temperature, wind speed, snowfall or precipitation. The weather derivatives are very much useful for concerns whose potential profits are volatile due to changes in weather conditions like agricultural products, processing, power generation, oil exploration, tourism, insurance, etc. Weighted average cost of capital (WACC) of a company is calculated by aggregating together the costs of each individual source of finance and weighted by their relative proportions to total amount of long-term funds raised. WACC is the required minimum rate of return the firm must earn to maintain its market value. WACC is taken as the discounting rate for appraisal of capital projects.

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Financial Management - Key Terms

Weighted average cost of capital is the expected average future cost of funds over the long run found by weighting the cost of each specific type of capital by its proportion in the firm’s capital structure. Widely-held company is a company whose securities are listed on a recognized stock exchange, whose tax rates are lower as compared to other concerns. With recourse is the basis on which receivables are sold to the factor with the understanding that all credit risks would be borne by the firm. Without recourse is the basis on which accounts receivables are sold to a factor with the understanding that the factor accepts all credit risks on the purchased accounts. Work breakdown structure is the total project work broken down according to the various components and will establish the connection between various components. Working capital is the excess of current assets over current liabilities. Working capital leverage refers to the impact of level of investment in working capital on company’s return on capital employed. It measures the responsiveness of ROCE for changes in current assets. Working capital management is concerned with the management of current assets. World trade organization (WTO) came into force w.e.f. 1.1.1995 replacing GATT, as result of Uruguay Round. The basic objectives of WTO include non-discriminatory treatment in international commerce, elimination of trade-barriers, promotion of free trade and settlement of disputes among member nations. Writer – The seller of the option is called ‘writer’. Yankee bond is a dollar denominated bond issued in the U.S. by a non-American company, make all payments to the investors in U.S. dollars. Yankee issues have access to long-term financing than is available in other markets. Yield to maturity (YTM) indicates the rate of return an investor who buys the bond in the market today earns if he holds the bond till maturity. It can be explained with the help of a graph called ‘yield to maturity curve’. Zero balance account is a system of cash management in which every day the firm totals are cheques presented for payment against the account and transfers the balance amount in the account by buying marketable securities. In case of shortage of cash the firm will sell marketable securities. Zero base budgeting is a method of budgeting whereby all activities are re-evaluated each time a budget is formulated and it requires each manager to justify his entire budget request in details from scratch and shift the burden of proof to each manager to justify why he should spend any money at all. Zero correlation describes two series that lack any relationship and have correlation coefficient close to zero. Zero coupon convertible note – In this case, the investor can either choose to convert it into equity shares by foregoing accrued interest or by choosing repayment of principal amount with interest accrued on it. Zero date of a project means a date is fixed up from which the implementation of the project begins, which is a base for counting the time as well as cost of the project.

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Financial Management - Key Terms

Zero growth model is an approach to dividend valuation that assumes a constant, non-growing dividend stream. Zero interest bonds are sold at a discount and on maturity, they will be repaid at face value. Zero working capital is inventory plus receivables minus payables. Zero working capital refers to a situation where at all times the current assets shall equal to the current liabilities and excess of investment in current assets is avoided and the firm’s current ratio is 1:1. * * *

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