APPENDIX II Glossary of Key Terms and Concepts 435 Capital rationing The allocation of lim- ited investment funds to a selection of investment projects smaller than all cur- rently acceptable projects; a fairly common condition. Capital structure The relative propor- tions of different sources of capital used in the long-term funding of the investments and operations of a company. Cash The amount of readily available currency owned by a company at a stated period in time. Cash accounting A method of account- ing in which revenues and expenses and all other transactions are recognized when cash changes hands, in contrast to the accrual method of accounting. Cash budget A periodic projection of cash receipts and cash disbursements over a specified length of time. (Cf. cash flow forecast.) Cash flow The positive (inflow) or nega- tive (outflow) movements of cash caused by an activity over a specific period of time. Cash flow analysis An economic method of analysis that employs the positive (inflow) and negative (outflow) movements of cash caused by an activity to determine the relative desirability of the activity; usu- ally involves discounted cash flow method- ology. Cash flow cycle The periodic movement of cash through an enterprise, caused by in- vestment, operating, and financing deci- sions. Cash flow forecast Aperiodic forecast of cash movements through an enterprise, rec- ognizing sources and uses of funds. Cash flow from operations Cash gener- ated or used by the operations of a business over a specified period of time; usually de- rived by adjusting aftertax net profit for noncash charges and noncash receipts. Cash flow return on investment (CFROI) The relationship of operational cash flows to the cash value of the assets employed in generating them. In its most sophisticated form, it employs present value techniques. Cash flow statement A financial state- ment listing the cash impact of the activities of a business over a specified period of time, separating the cash flows into the ar- eas of operations, investments, and financ- ing. (Cf. funds flow statement.) Cash value added (CVA) A form of net present value analysis expressing the in- crease in present value caused by a business investment, a strategic plan, or the opera- tions of a business unit. Collection period The average number of days over which accounts receivable are outstanding, either in total or by defined categories; a measure of the effectiveness with which customer credit is managed. Common dividends The total amount of dividends paid to a company’s common shareholders in the form of cash or stock. Common shares (common stock) Secu- rities representing a direct ownership inter- est in a corporation and a residual claim on the assets. Common shares outstanding—basic The number of common shares of a company is- sued and actually outstanding at a point in time, used in calculating earnings per share—basic. Common shares outstanding—diluted The number of common shares of a com- pany issued and actually outstanding at a point in time, plus the number of shares po- tentially outstanding from exercise of stock options, rights and warrants, and securities convertible into common shares, used in calculating earnings per share—diluted. Common-size financial statements A ratio analysis of balance sheets and income statements in which all elements are repre- sented as a percentage of assets or net sales, respectively. Used in analyzing trends and in comparing statements from different companies. Comparables Selected assets or business entities chosen by analysts to establish comparability with an asset or business be- ing valued; used in determining the fair market value in the absence of market transactions. hel78340_apx2.qxd 9/27/01 11:33 AM Page 435 436 Techniques of Financial Analysis: A Guide to Value Creation Compounding The process of calculat- ing the growing value of a sum of money over time, caused by the periodic interest earned and by the reinvestment of such in- terest. Constant-dollar analysis The adjustment of financial magnitudes for inflation to re- flect a common dollar value basis (using dollar values of a specified point in time), and the use of these adjusted values in ac- counting or economic analysis. Consumer price index (CPI) An index provided by the U.S. government that rep- resents the periodic change in the cost of a selected group of items purchased by con- sumers; used as a measure of inflation. Contribution analysis Amethod of analy- sis that determines the relative excess of revenue over variable costs of product lines, business segments, and activities, and judges the contribution made toward meet- ing fixed costs, overhead, and profits. Contribution margin The excess (or deficit) of revenue over the variable costs of products or services, at times also the ex- cess (or deficit) of revenue over the total cost of products or services (cost of goods or services sold). Conversion ratio The stated number of common shares or other securities into which a convertible security may be ex- changed. Conversion value The market value rep- resented by the common shares or other as- sets into which a convertible security may be exchanged. Convertible security Afinancial security that may be exchanged at the option of the holder into another security or asset with a prescribed conversion ratio. Cost The transaction value at which an asset was acquired; also, any periodic ex- pense recognized against matching periodic revenue. Cost of capital (weighted average cost of capital, hurdle rate) The weighted aver- age of the aftertax cost to a company of all forms of long-term financing used; em- ployed as a minimum standard for the re- turn to be earned on new investments. Cost of debt The cost to a company of employing debt, developed from the after- tax interest charges of various forms of debt. Cost of equity The cost to a company of employing common shareholders’ funds, developed from the investors’ expectations about the return from holding such shares, usually in the form of the combination of dividends and capital gains. Cost of goods (services) sold (cost of sales) The total of all costs and expenses incurred in producing, or acquiring, goods or services for sale. Cost of preferred stock The cost to a company of employing preferred share- holders’ funds, developed from the pretax preferred dividend required by preferred holders. Coupon rate The stated interest rate specified on the interest coupons attached to bonds, as contrasted with the yield ob- tained on a bond, which relates the coupon rate to the market value of the bond. Covenant Provision in the bond agree- ment specifying restrictions or other re- quirements that the issuer has to observe to maintain the bond’s credit rating. Coverage Relationship of fixed require- ments, such as interest or burden connected with debt, to operating income before or af- ter taxes. (Cf. times interest earned, times burden covered.) Credit (creditworthiness) The recog- nized ability of an individual or company to assume indebtedness with the prospect of properly servicing such debt. Cumulative effect of accounting changes The aftertax effect of changes in accounting methods used by a company, shown as a line item in the income statement and used in arriving at net income. Cumulative preferred stock A form of preferred stock that carries the provision hel78340_apx2.qxd 9/27/01 11:33 AM Page 436 TEAMFLY Team-Fly ® APPENDIX II Glossary of Key Terms and Concepts 437 that any unpaid dividends accumulate for later payment, and must be paid in full be- fore common dividends may be declared. Current asset Any asset on the balance sheet with a short-term expectation of being turned into cash, such as cash, receivables, and inventories; usually considered as hav- ing a one-year time horizon or less. Current-dollar accounting The adjust- ment of historical financial magnitudes for inflation to reflect current-dollar values (adjusting for price changes) and the use of these adjusted values in accounting or economic analysis. (Cf. constant-dollar analysis.) Current liability Any liability on the balance sheet with a short-term maturity, usually payable within one year, such as accounts payable and accrued taxes. Current portion of long-term debt The proportion of a long-term liability that is due and payable within one year. Current ratio A common measure of liquidity that relates the sum of current assets to the sum of current liabilities. Current-value basis The restatement of the recorded values of selected assets in current-dollar terms to reflect price changes. (Cf. current-dollar accounting.) Cutoff rate The minimum rate of return (hurdle rate) that capital investment proj- ects have to meet, usually based on the cost of capital or a judgmentally adjusted standard. Cyclical variations The impact on a company’s funds flows from the operational changes caused by business cycles. Days’ sales A measure of the credit qual- ity of accounts receivable, which expresses outstanding receivables in terms of average daily sales; can be compared with the credit terms under which sales were made. Debt (liability) An obligation to pay amounts due (and interest if required) under specified terms, or to provide goods or ser- vices to others. Debt to assets A ratio relating outstand- ing debt obligations (usually long-term debt but at times all types of debt) to total assets; used as a measure of financial leverage. (Cf. debt to equity.) Debt to capitalization A ratio relating long-term debt to a company’s capitaliza- tion; used as a measure of financial lever- age as found in the capital structure. (Cf. debt to equity.) Debt to equity A ratio relating outstand- ing debt obligations (usually long-term debt but at times all types of debt) to sharehold- ers’ equity; used as a measure of financial leverage. Default Failure to make a payment on a debt obligation when due. Deferred charges A provision recorded on the balance sheet to reflect expenses in- curred, but applicable to future accounting periods. Deferred income taxes A provision for income tax liabilities or income tax assets recorded on the balance sheet, arising from timing differences between recognized tax liabilities in a company’s accounting sys- tem and tax liabilities reported to the tax au- thorities. Deflation A decline in general price lev- els. (Cf. inflation.) Depreciation The decline in an asset’s value, from use or obsolescence, that’s rec- ognized in the accounting system and for income tax purposes as a periodic alloca- tion (write-off) against income of a portion of the original cost of the asset. (Cf. accel- erated depreciation; noncash charges.) Dilution The proportional reduction of earnings per share or book value per share from an increase in the number of shares outstanding, either from a new issue or from conversion of convertible securities outstanding. Discounted cash flow The discounting methodology employed in determining the economic attractiveness of capital invest- ment projects, which reduces the value of future cash receipts or payments. hel78340_apx2.qxd 9/27/01 11:33 AM Page 437 438 Techniques of Financial Analysis: A Guide to Value Creation Discounted cash flow rate of return (DCF) The rate of return (yield) that equates a project’s cash inflows and out- flows over its economic life; also called in- ternal rate of return. Discounting The process of calculating the reduced value of a future sum or series of sums of money in proportion to the op- portunity of earning interest and the dis- tance in time of payment or receipt. (Cf. compounding, present value.) Discount rate The rate of return or stan- dard used in calculating the present value of future cash flows, using the discounting process. Disinvestment The act of disposing of assets or whole business segments, caused by a reassessment of the strategic fit of these assets; the opposite of investment. Dispositions The net value received from the sale of operations, lines of business, or divisions of a company during a stated period. Diversification The process of investing in a number of unrelated or partially inter- related assets or activities to achieve a more stable performance of the business portfolio. Dividend coverage Relationship of the amount of common and/or preferred divi- dends to aftertax earnings of a company; a test of the ability of the company to pay the current level of dividends. Dividend discount model A valuation method for common stock that employs the present value of expected future dividends and any change in the expected level of div- idends. Dividend payout A ratio relating the amount of dividends distributed to the after- tax earnings of a corporation to derive the percentage of earnings paid to shareholders. Dividend yield The current return to shareholders from dividends received over a specified period, derived by dividing div- idends per share by the current average market price of the stock. (Cf. yield.) Dynamic analysis A method of analyzing business decisions that incorporates the ef- fect of likely changes in key variables, as contrasted with fixed assumptions. (Cf. sen- sitivity analysis.) Earnings (income, net income, profit, net profit) The difference between all recorded revenues and all related costs and expenses for a specified period, using gen- erally accepted accounting principles. Earnings before interest and taxes (EBIT) An expression of a company’s earning power before the effects of financ- ing and taxation; used in a variety of finan- cial analyses. Earnings per share (EPS) The propor- tional share of a corporation’s earnings that can be claimed by each share of common stock outstanding, derived by dividing af- tertax earnings after payment of preferred dividends by the average number of com- mon shares outstanding during the period. (Cf. earnings per share—basic.) Earnings per share—basic A company’s earnings per share calculated on the basis of the average of all common shares actually outstanding. (Cf. common shares outstand- ing—basic.) Earnings per share—diluted A com- pany’s earnings per share calculated on the basis of the average of all common shares actually outstanding at a point in time, plus the number of shares potentially outstand- ing from exercise of stock options, rights and warrants, and securities convertible into common shares. (Cf. common shares outstanding—diluted.) Earnings yield The current return to shareholders from earnings recorded for a specified period, derived by dividing peri- odic earnings by the stock’s current or aver- age market price. (Cf. yield.) Economic analysis The development of the economic impact of a business decision that determines the actual trade-off between hel78340_apx2.qxd 9/27/01 11:33 AM Page 438 APPENDIX II Glossary of Key Terms and Concepts 439 economic costs and benefits in a cash flow framework independent of accounting con- ventions. Economic benefit The consequence of a decision that causes an ultimate increase in present and future cash flows. Economic cost The consequence of a de- cision that causes an ultimate reduction in present and future cash flows. Economic earnings (loss) The net result of a trade-off between economic benefits and economic costs. Economic life The time over which a cur- rent or future investment can be expected to provide economic benefits, which is inde- pendent of the physical life of any assets in- volved. Economic profit The amount of aftertax net operating profit (NOPAT) earned on the capital base supporting the activity relative to the company’s weighted average cost of capital applied to the capital base. Economic return A measure of the earn- ings power of an investment in terms of net cash flows generated by the capital com- mitted. (Cf. discounted cash flow.) Economic trade-off The comparison of the economic benefits and economic costs caused by a business decision using a cash flow framework. Economic value The net present value of all future economic benefits and costs ex- pected from an existing or prospective in- vestment. Economic value added (EVA™) A form of expressing the value created by investing in projects whose returns exceed the com- pany’s cost of capital. The simplest way is to show the difference between annual prof- its (or cash flow) and the cost of the assets employed. The concept is also applied to the companies and divisions as a whole. Enterprise value (firm value) The net present value of all estimated future cash flows to be generated by a business. Equity (owners’equity, net worth, share- holders’equity) The recorded ownership claim of common and preferred sharehold- ers in a corporation as reflected on the bal- ance sheet. Also defined as total assets less all liabilities. Equivalence A point of indifference at which the present value of future cash flows reflects the return expectations of a prospective investor. Expected return (expectation) A weighted average of alternative outcomes of an investment, using the respective prob- abilities as weights. Expense A periodic offset against rev- enue recognized under generally accepted accounting principles, representing either a direct cash outlay or an allocation or ac- crual of past and future outlays. Extraordinary items The aftertax impact of costs or revenues encountered on a non- recurring basis outside the normal opera- tions of a company during a stated period. Fair market value (FMV) The price for an asset on which two rational parties with sufficient information would agree in the absence of negotiating pressure. Financial Accounting Standards Board (FASB) The official rule-making institute of the accounting community, which is pri- vately funded by the profession. Financial analysis The process of deter- mining and weighing the financial impact of business decisions. Financial flexibility The ability to main- tain alternative choices for raising addi- tional capital while preserving a capital structure appropriate to the risks and condi- tions of a company’s business. Financial Genome A professional soft- ware application by Modernsoft, Inc. de- signed for financial analysis, statement preparation, and financial planning. Financial growth plan A model of future financial flows that tracks the results of key investment, operational, and financing di- mensions under a variety of assumptions about strategies, policies, and business con- ditions. hel78340_apx2.qxd 9/27/01 11:33 AM Page 439 440 Techniques of Financial Analysis: A Guide to Value Creation Financial leverage The magnifying (or diminishing) effect on return on equity from the use of debt in the capital struc- ture, caused by introducing fixed interest charges against the returns obtained from the incremental funds invested. (Cf. oper- ating leverage.) Financial model The representation in a computer program of key financial dimen- sions of a business system for purposes of simulating the impact of management deci- sions. (Cf. financial growth plan.) Financial statements Key periodic state- ments prepared under generally accepted accounting principles, which represent the financial condition of a company (balance sheet), the operating results (income state- ment), the changes in funds flows (cash flow statement), and the changes in owners’ eq- uity (statement of changes in shareholders’ equity). Financing The provision of funds from internal or external sources to support the investments and operations of a business. First-in, first-out (FIFO) A method of accounting for inventory in which the old- est item is assumed to be used or sold first. (Cf. last-in, first-out.) Fixed assets Any tangible asset on the balance sheet considered to have a life or usefulness for a business in excess of one year, such as land, buildings, and machin- ery. (Cf. current assets.) Fixed costs Any cost that doesn’t vary with changes in the volume of operations over time. Fixed-income security Any security that provides an unchanging stream of interest or dividends to the holder over its life. Foreign exchange exposure The poten- tial loss from an unexpected change in cur- rency exchange rates affecting investments or operations. Free cash flow The net cash flow avail- able to a company after providing for all ac- ceptable new investments to support its strategy, before any dividend payments or changes in financing. Fully diluted earnings per share Earn- ings per share which are calculated on the assumption that all outstanding convertible securities and warrants have been con- verted into the appropriate number of com- mon shares, raising the denominator and reducing earnings per share. Funds A general term denoting means of payment, often equated with cash. Funds flow (cash flow) The movement of funds of all types through a business over time, ultimately resulting in changes in cash. Funds flow statement A financial state- ment prepared to display the funds move- ments in a business over a specified period of time, separated into sections on opera- tions, investment, financing, and cash bal- ances. (Cf. Cash flow statement) Going-concern value The net present value of the expected future cash flows generated by a business from its normal operations. (Cf. economic value, enterprise value.) Goodwill A category of intangible asset representing the excess paid over recorded values for acquisitions. It is generally amor- tized over specific time periods. Gross margin The difference between net sales and cost of goods sold (or cost of services provided), generally expressed as a ratio of this difference divided by net sales. Growth/decline variations The impact on a company’s funds flows from the opera- tional changes caused by growth or decline in the volume of business. Hedge A strategy to neutralize the risk of an investment by engaging in offsetting contracts whereby potential gains and losses will cancel each other. Historical cost principle An accounting principle requiring the recording of transac- tions and the maintenance of recorded val- ues at the actual level incurred, regardless hel78340_apx2.qxd 9/27/01 11:33 AM Page 440 APPENDIX II Glossary of Key Terms and Concepts 441 of any subsequent changes in the value of the assets or liabilities involved. Hurdle rate A minimum standard for the return required of an investment, used in se- lecting from alternative investment choices. Income The difference between the rev- enues and the matching costs and expenses for a specified period. (Cf. earnings.) Income statement (operating statement, profit and loss statement) A financial statement reporting the periodic revenues and matching costs and expenses for a spec- ified period, and deriving the income for the period. Incremental analysis A method of analy- sis that focuses on the impact of changes caused by a business decision. Inflation An increase in general price levels, the opposite of deflation. Inflation premium The increased return on investment required to compensate the holders for expected inflation. Insolvency The condition where an indi- vidual’s or company’s liabilities exceed the realizable value of the assets held. Intangibles A category of asset repre- senting intangible values such as patents, software, and goodwill from acquisitions. These are generally amortized over specific time periods. Interest coverage Relationship of peri- odic interest expense to operating income before or after taxes, used to judge a com- pany’s ability to pay interest charges. (Cf. times interest earned.) Internal rate of return (IRR) The dis- count rate that equates the cash inflows and cash outflows of an investment project, re- sulting in a net present value of zero. (Cf. rate of return, yield.) Inventory turnover A ratio that relates ending inventory or average inventory to the cost of goods sold for a specified period of time; used in judging the effectiveness with which inventories are controlled. Inventory valuation Any adjustment to recorded inventory values to correct for dif- ferences between historical costs and cur- rent prices, also affecting cost of goods sold. Investment(s) The commitment of funds for purposes of obtaining an economic re- turn over a period of time, usually in the form of periodic cash flows and/or a termi- nal value. Investment value The value of a convert- ible security based strictly on its character- istics as a fixed-income security, without regard to its conversion provision. Junk bond Any bond issued by corpora- tions with risk characteristics higher than what’s normally rated as investment-grade risk (normal risk exposure). Last-in, first-out (LIFO) A method of accounting for inventory in which the newest item is assumed to be used or sold first. (Cf. first-in, first-out.) Leasing The process of contracting for the use of assets owned by others over a specified period of time, in exchange for a stipulated pattern of periodic payments. Leverage The magnifying effect from volume changes on profits caused by fixed elements in a company’s cost structure, or the magnifying effect from profit changes on return on equity caused by fixed-cost debt obligations in the capital structure. (Cf. financial leverage, operating leverage.) Leveraged buyout (LBO) The acquisi- tion of a business by investors using a high percentage of debt carried by the business itself. Liability An obligation to pay a specified amount or to perform a service; at times also the recognized potential obligation to pay or perform a service (contingent liability). Liquid asset An asset that can be rapidly converted into cash without suffering a sig- nificant reduction in value, usually classi- fied as a current asset. hel78340_apx2.qxd 9/27/01 11:33 AM Page 441 442 Techniques of Financial Analysis: A Guide to Value Creation Liquidation The process of terminating a business entity by selling its assets, paying off its liabilities, and distributing any re- maining cash to its owners. Liquidation value The estimated value of a business based on liquidation of its assets. Liquidity The degree to which a com- pany is readily able to meet its current obligations from liquid assets. (Cf. acid test, current ratio.) Long-term debt Any debt obligation of a company with a maturity of more than one year. Managerial economics The methodol- ogy underlying the analysis and resolution of the economic (cash flow) trade-offs in- volved in making management decisions. Marginal costs (revenues) Increments of costs and revenues attributable to changes in a variable affecting an issue being de- cided. Market to book value The relationship between the current market price of com- mon stock and its recorded book value, a ra- tio often used in judging the performance of a company’s stock. Market value The value of an asset as determined in an unconstrained market of multiple buyers and sellers, such as a secu- rities exchange. Market value added (MVA) The differ- ence between the recorded value of a com- pany’s capitalization and the current market value of the securities representing it. Market value of equity The combined value of all common shares of a company at current market prices. (Cf. book value of equity.) Market value of firm The market value of a company’s equity plus the market value of its debt. Minority interest A small portion of shareholders’ equity held by outsiders in a corporate entity acquired by a company. Monetary asset Any asset defined in terms of units of currency, such as cash and accounts receivable. Multiple hurdle rates A set of minimum return standards in a company that are used to judge the desirability of investments in activities or lines of business with widely different risk characteristics. Mutually exclusive alternatives Alter- native investments for achieving the same objective, of which only one can be under- taken. Net assets Total assets less current liabil- ities, as recorded on the balance sheet. Net assets turnover An expression of the effectiveness with which assets generate sales, defined as the ratio of sales to net as- sets, on an average or ending value basis. Net income (loss) The difference be- tween periodic revenues and matching costs and expenses. (Cf. earnings, net profit, profit.) Net income available for common divi- dends Net income adjusted for any pre- ferred dividends declared during the period, representing the residual claim of the com- mon shareholders. Net investment The commitment of new funds to an investment project, net of any funds recovered due to the decision to make the investment, adjusted for tax implica- tions. Net operating profit after tax (NOPAT) Net profit from operations before interest and nonoperating income or expenses, ad- justed for applicable income taxes. Used in a variety of ratios and valuation concepts. Net present value (NPV) The difference between the present values of cash inflows and outflows from an investment, represent- ing the net gain or loss in value expected from the investment relative to the earnings standard applied. Net profit The difference between peri- odic revenues and matching costs and hel78340_apx2.qxd 9/27/01 11:33 AM Page 442 APPENDIX II Glossary of Key Terms and Concepts 443 expenses, after applicable income taxes. (Cf. earnings, net income, profit.) Net property, plant and equipment The residual recorded value of property, plant and equipment, after deducting the amount of applicable accumulated depreciation to date. Net sales Total revenue from sales for a specified period, less adjustments such as returns, allowances, and sales discounts. Net worth The recorded value of share- holders’equity on the balance sheet. Nominal amount Any quantity not ad- justed for changes in the purchasing power of the currency in which it’s recorded. (Cf. real amount.) Noncash item An expense or revenue recognized in the accounting process that doesn’t represent a cash flow during the pe- riod, such as depreciation or unrealized in- come or gains. Notes payable Debt obligations repre- senting trade or other credit extended to a company, generally interest-bearing com- mitments. Ongoing value The value of a business or activity that is assumed to be continuing at the termination point of a discounted cash flow analysis for valuation purposes, also referred to as terminal value. Operating cash flow The net cash flow generated by the operations of a business during a specified period, usually on an af- tertax basis and adjusted for all noncash ac- counting elements such as depreciation and amortization. Operating funds Funds required to sup- port current operations, such as the various working capital items. Operating leverage The magnifying (or diminishing) effect of volume changes on profits caused by the fixed costs in the com- pany’s operations. Operating statement (income statement) Afinancial statement reporting the revenues and matching costs and expenses for a spec- ified period, and deriving the net income. Operational analysis The various meth- ods of analyzing the specific and compara- tive aspects of a company’s operating performance. Operations The activities in a company that support the basic purpose of the busi- ness, generating revenues and managing re- lated costs and expenses for profitable results. Opportunity cost Economic benefits for- gone by selecting one alternative course of action over another. Opportunity rate of return A rate of re- turn standard reflecting the long-term level of returns expected in a business, often based on a company’s cost of capital. Option A contractual opportunity to pur- chase or sell an asset or security at a prede- termined price, without the obligation of doing so. Over-the-counter market (OTC) A mar- ket network among security dealers that permits electronic trading of securities not listed on a formal securities exchange. Owners’ equity The recorded value of preferred and common shareholders’claims against the assets on a company’s balance sheet; also, the proprietors’recorded claims in the case of an unincorporated business or partnership. (Cf. equity, shareholders’ equity.) Paid-in capital The recorded amount of capital provided by shareholders on the balance sheet, as contrasted with retained earnings. Par value The nominal value established by the issuer of a security, as contrasted with the market value of the security. In the case of a bond, the issuing company con- tracts to pay the par value at maturity. Payables See accounts payable. Payables period A translation of ac- counts payable into the days of average purchases outstanding at a point in time; used as an indicator of the effectiveness with which trade credit is employed. hel78340_apx2.qxd 9/27/01 11:33 AM Page 443 444 Techniques of Financial Analysis: A Guide to Value Creation Payback period The period of time over which the cash flows from an investment are expected to recover the initial outlay. Perpetuity A series of level periodic re- ceipts or payments (annuity) expected to last forever. Plug figure A common term used to rep- resent an unknown variable in a financial analysis, such as the amount of financing required in a pro forma projection. (Cf. pro forma statement.) Portfolio A set of diverse investments held by an individual or a company. Preferred stock Aspecial class of capital stock, usually with a dividend provision, that receives a form of preference over common stock in its claims on earnings and assets. Prepaid expenses The portion of any ex- penses paid during a stated period but ap- plicable to future periods, shown as a current asset on the balance sheet. Present value The value today of a future sum or series of sums of money, calculated by discounting the future sums with an ap- propriate discount rate. Present value payback The point in the economic life of an investment project at which the cumulative present value of cash inflows equals the present value of the cash outflows. Price to earnings (P/E) The relationship of the market price of a share of stock to the most recent earnings per share over 12 months; used as a rough indicator of what investors are willing to pay for $1 of a com- pany’s earnings. Principal The original amount of a loan or bond, also called face value, on which the rate of interest to be paid is based. Private placement The sale of securities to a selected group of investors rather than through a public offering. Profit The difference between periodic revenues and matching costs and expenses. (Cf. earnings, net profit.) Profitability index (benefit/cost ratio, BCR) A measure of investment desirability, de- fined as the present value of all cash in- flows expected over the economic life of a project divided by the present value of the cash outflows. Profit center An organizational segment of a business in which revenues, costs, and expenses can be recognized separately, al- lowing the activity to be managed for profit performance. Pro forma statement A projected finan- cial statement reflecting the financial im- pact of a set of assumed conditions for a specified future period. Projection A forecast of the quantitative implications of a set of assumed conditions. Provision for income taxes The amount of income taxes recognized as an expense for a stated period on the income statement, as distinguished from the amount of income taxes reported to the tax authorities. Any difference is due to differences in the tim- ing and pattern of revenues and expenses reported for tax purposes, and this amount is recognized as deferred income taxes on the balance sheet. Public issue (public offering) The sale of newly issued securities to the public through underwriters. (Cf. private place- ment.) Purchasing power parity A condition in which commodities in different countries cost the same amount when prices are ex- pressed in a given currency, due to expected adjustments in foreign exchange rates. Quick ratio (acid test) A stringent mea- sure of liquidity relating current cash assets (cash, cash equivalents, and receivables) to current liabilities. Quick sale value The value of an asset or business when assumed to be sold under hurried conditions, resulting generally in a lower valuation than market value. hel78340_apx2.qxd 9/27/01 11:33 AM Page 444 [...]... securities and commodity markets; news, feature articles, and statistics on economic and business conditions; news and earnings reports for individual companies; dividend announcements; currency, commodity, and trading data; and a great deal of coverage of international business and economic conditions Major U.S and Canadian dailies also carry key financial and economic data, but their coverage and emphasis... broad range of financial information Foremost among these at the time of this writing is Yahoo Finance, which provides up-to-the-minute summary information on U.S and international financial market data, stock and other securities quotations, individual company stock data and charts, financial news, and much more Infoseek, Lycos, and Excite each offer a selection of financial data, news, and a variety... contain periodic listings and analyses of financial information oriented toward the investor and financial analyst The advent of the computer has made possible the rapid collection and analysis of company and economic data, and current information can now be obtained on-line through database access or in hard copy on a timely basis The most important sources of periodic financial and business information... publications are specialized and oriented toward a specific community of interest; others deal with financial conditions in foreign countries The titles are largely self-explanatory: Banker’s Magazine CFO Magazine Corporate Financing Credit and Financial Management Finance Financial Analysts Journal Financial Executive Financial Management Financial World Journal of Banking and Finance Journal of Commerce... by newspapers and periodicals, such as The Wall Street Journal, which indicates which company’s reports are available in its stock quotation columns hel78340_apx3.qxd 460 9/27/01 11:34 AM Page 460 Techniques of Financial Analysis: A Guide to Value Creation Financial Manuals and Services Most current financial and economic information is now available through various on-line services and information... summaries of advancing and declining conditions, highs and lows for the year, and so on Again, these provide the investor with a general feel for the daily movements of the bond markets and interest rate conditions The most commonly used averages are the Dow Jones Bond Averages (20 bonds, including 10 public utilities and 10 industrials), Merrill Lynch Corporate Debt Issues, and Lehman Brothers U.S... inquiries, using the special catalog and information links of the latter Current Financial Information The common way to keep abreast of financial developments has long been to scan the daily financial pages of national, metropolitan, and regional newspapers The most complete and widely read financial coverage is found in The Wall Street Journal (http://www.dowjones.com) and The New York Times (http://www... stock quotations, security offerings, banking developments, and financial, industrial, and commodity trends, the Commercial and Financial Chronicle is the most comprehensive print source available The Wall Street Transcript (http://twst.com) analyzes securities from a great variety of individual companies, on both a financial and economic basis, and assesses the technical indications of stock market charts... trends It profiles major U.S and international executives in addition to hel78340_apx3.qxd 9/27/01 458 11:34 AM Page 458 Techniques of Financial Analysis: A Guide to Value Creation giving detailed articles on industr.y, company, and socioeconomic trends The magazine’s annual listing and ranking of the Fortune 500 (the best-performing U.S companies) and similar listings of banks and major foreign companies... stock, and 15 utility stocks These summaries provide an overview of the market’s mood and direction The various stock price averages and indexes are popular and important clues to the stock market’s behavior in general They’re calculated daily and in most cases continuously from on-line databases The averages are followed by hel78340_apx3.qxd 452 9/27/01 11:34 AM Page 452 Techniques of Financial Analysis: . stock and other securities quota- tions, individual company stock data and charts, financial news, and much more. Infoseek, Lycos, and Excite each offer a selection of financial data, news, and. buyers and sellers of such securities as government bonds, state and municipal bonds, stocks and bonds of smaller and hel78340_apx3.qxd 9/27/01 11:34 AM Page 453 454 Techniques of Financial Analysis:. currency, commodity, and trading data; and a great deal of coverage of international business and economic conditions. Major U.S. and Canadian dailies also carry key financial and economic data,