Glossary - Business Finance - ثاني ثانوي

352Business Finance Glossary accounts receivable amounts of money that are due to be paid to a seller from a buyer acquisition the purchase of a company by another company activity ratios an indicator of how well a company is using its resources to generate revenues and cash annuity a series of equal, annual payments with a constant rate of return articles of association/articles of incorporation bylaws, or procedures, for the operation of a joint stock company asset-backed securities bonds issued to finance activities that generate income assets items or property owned by a firm, household, or government and valued in monetary terms balance sheet a financial statement that enumerates (as of a point in time) what an economic unit owns and owes and its net worth banker's acceptances short-term promissory notes for payment guaranteed by a bank banknote a form of paper money in which the government of issue's central bank promises to pay the bearer the sum of its stated value beta coefficient a measure of systematic risk; an index of the risk of a stock's return relative to changes in the return on the market

bid and ask prices prices quoted by market makers at which they are willing to buy and sell securities board of directors body elected by and responsible to stockholders to set policy and hire management to run a corporation bonds a debt obligation issued by entitles such as governments and businesses call feature the right of a debtor to retire a bond prior to maturity capital asset pricing model (CAPM) a method of calculating the relationship between systematic risk and the expected return on assets, particularly stock capital gain the increase in the value of the asset, based on the asset's original price capital structure the amount of debt and equity used by a company to finance its business activities cash dividends distribution from earnings paid into the bank accounts of shareholders commercial paper unsecured short-term promissory note issued by the most creditworthy corporations common stock security representing ownership in a corporation; those who own these securities have a final claim on the firm's assets and earnings after the firm has met its obligations to creditors and preferred stockholders compounding the process by which earnings are based on the original amount as well as previous amounts earned controllable risks unexpected possibilities that can be avoided or whose negative effects can be reduced by careful actions وزارة التعليم GLOSSARY 353

' 354Business Finance 2921-1775 convertible bonds a form of loan that may be converted into (exchanged for) stock at the option of the person who has taken it out correlation the relationship between two or more financial variables over time correspondent bank a financial institution which performs services for one or more other financial institutions and often serves as a point of liaison between domestic and international financial institutions cost of capital also called required rate of return, this is the rate required by lenders and investors who are letting the company use their money cost of common stock the return required by investors to buy the shares of ownership in a firm, which is viewed as an opportunity cost cost of debt the rate of return required by creditors cost of equity the required return company owners expect to earn based on the money they have invested in the company cost of preferred stock the relationship between the dividend from dividend-paying shares in a firm and the market price coupon the interest rate received by the bondholder coverage ratios the ability of the firm to service interest or dividend payments credit ratings classification schemes designed to indicate the risks associated with a particular debt instrument cross-sectional analysis an evaluation of data about several firms in the same industry at a point in time current assets short-term assets that are expected to be converted into cash during the fiscal year

current liability a debt that must be paid during the fiscal year current ratio ratio of a firm's current assets to its current liabilities; measure of liquidity current yield/yield to maturity the rate of return on a bond investment date of record the day on which an investor must own stock in order to receive the dividend payment day order order to buy or sell at a specified price that is canceled at the end of the day if it is not executed debentures unsecured bonds supported by the general credit of the company debt ratio the total amount of money owed divided by the total assets; the proportion of assets financed by money owed; a measure of financial leverage debt/net worth ratio the ratio of money owed to equity; money owed divided by equity default when the borrower fails to meet the terms specified in the indenture of a debt issue depository receipts (DRS) receipts issued for foreign securities held by a trustee depreciation the process of allocating the cost of the fixed assets over a period of time derivatives contracts between two parties that take their price from the value of an underlying asset, such as stock, group of stocks (an index), or other measure dilution reduction in earnings per share as the result of the issuing of additional shares وزارة التصليح 2921-189 GLOSSARY 355

356Business Finance discounting the process of determining the present value of a payment that is to be received in the future diversifiable risk (unsystematic risk) uncertainties associated with individual events that affect a particular asset; firm-specific uncertainty that is reduced by diversifying investment portfolios dividends a period payment to a stock shareholder in cash or other shares of stock economic risk uncertainty with a potential financial impact efficient market hypothesis (EMH) the theory that when new information comes into the market, it is immediately reflected in stock prices and, as a result, all stock prices are fair values equity the sum total of a firm's assets; a firm's book value or net worth Eurobonds bonds sold in a foreign country but denominated in the currency of the issuing firm excess reserves the amount of funds a bank holds in addition to the amount of funds it is required to hold exchange-traded funds like mutual funds, but passive and traded like stocks expected return the financial or other incentive for accepting risk by investing ex dividend referring to stock purchases which do not entitle the buyer to the next dividend financial leverage use of borrowed funds in return for agreeing to pay a fixed return; use of debt financing

financial transaction costs costs involved in the buying or selling of financial products fixed asset turnover an efficiency ratio that indicates how well or efficiently a business uses objects that have been purchased for long-term use to generate sales Notation costs expenses associated with selling new stock future value the amount by which savings will increase based on a certain rate and over a certain time period futures contract an agreement to buy or sell a commodity contract or security at some point in the months or years to come good-till-canceled order order to buy or sell at a specified price (limit price) that remains in effect until it is executed by the broker or canceled by the investor good-till-date order an order to buy or sell that is active until a specific date gross profit margin ratio of revenues minus cost of goods sold to sales; percentage earnings on sales before considering operating expenses, interest, and taxes high-yield securities (junk bonds) poor quality debt with high returns and a high probability of default horizontal analysis a method for analyzing accounting data by comparing current financial data to previous reporting periods human risks uncertainty resulting from the actions of individuals, groups, or organizations Income statement financial statement that summarizes revenues and expenses for a period of time to determine profit or loss وزارة التعليم " GLOSSARY 357

Pl ' 358Business Finance indenture a legal document specifying the terms of a debt issue insider trading a situation where someone who works for a firm, or has access to information about it, trades the firm's securities because they have confidential or non public information about the firm inventory what a firm has available to sell Inventory turnover the speed with which the things that a firm has available to sell are sold leverage ratios An indicator of the extent to which a firm's operations are funded by debt. liabilities what an economic unit owes expressed in monetary terms limit order a direction given to a broker to buy or sell a security at a specific price liquidity the ease of converting an asset into cash without loss liquidity ratios a company's ability to pay off current debt obligations without securing external capital long position the purchase of securities in anticipation of a price increase long-term assets things a firm owns that it expects to hold for more than a year, such as plant and equipment long-term liability debt that becomes due to be repaid after one year m-1 the amount of money in circulation in the form of coins, currency, and demand deposits

m-2 the amount of money in circulation in the form of coins, currency, demand deposits, savings accounts, and small certificates of deposit margin an investor's equity in a security position margin requirement the percentage of a purchase price that must be paid up front when buying securities market capitalization-weighted index the total value of all a firm's shares listed on the market on a day divided by the total value of all the shares the firm previously listed on the index market maker a dealer who engages in the business of buying and selling securities for their own account market order instructions to buy or sell a security at the best current price market return the amount of money that a firm gets back from the overall value of its equities maturity date the day by which a debt must be repaid money Anything that is generally accepted as a means of payment money market niutual fund an investment company that invests solely in short-term money market instruments money supply the total amount of currency in circulation mortgage bonds a form of loan that is secured by a claim on real estate mutual funds an assortment of securities developed by investment firms and offered to investors وزارة التعليدر 2921-1829 GLOSSARY 359

360 Business Finance 2921-1685 national debt the total outstanding obligations of a country natural risks uncertainty resulting from natural events or phenomena non-annual compounding Payment of interest more frequently than once a year opportunity cost what a person gives up by making a choice optimal capital structure the combination of debt and equity that results in the lowest cost of capital and maximum market value overpriced an item that costs more than its worth pay date/distribution date the day on which a dividend is paid to stockholders payout ratio the ratio of dividends to earnings per share portfolio risk uncertainty associated with making a range of investments which involve both systematic and unsystematic risk preemptive rights the right of current stockholders to maintain their proportionate ownership in the company preferred stock the shares in a company that are owned by people who have the right to receive part of the company's profits before the holders of common stock present value the current value of a future sum of money given a specified rate of return principal the amount that a borrower owes

profitability ratio a firm's ability to generate earnings relative to its revenue, operating costs, assets, or equity over time prospectus a document that provides information about an investment such as a stock or mutual fund pure risk uncertainty with no opportunity for financial gain, only a potential loss quick ratio (acid test) current assets excluding inventory divided by current liabilities; an indicator of liquidity ratio analysis The process of evaluating elements of a financial report as they relate to other pieces of information in the same report receivables turnover the speed with which a firm is able to collect money that is owed repurchase agreement (repo) the sale of a short-term security in which the seller agrees to buy back the security at a specified price at a specified date required reserves funds that banks must hold against their deposit liabilities required return the amount that investors need to get back in order for them to be induced to make an investment residual claim a claim to a share of earnings after a debt has been settled retained earnings accumulated profit after dividends retiring debt when a borrower pays back the money they owed in full return what is earned on an investment; the sum of income and capital gains generated by an investment وزارة التصليدر 921-1 GLOSSARY 361

P F 362 Business Finance 2921-1879 return on total assets ratio of a firm's earnings to the total amount that it owns; a percentage earned on assets risk the degree of uncertainty about whether an anticipated return will be achieved risk management the process of systematically identifying potential uncertainties and making plans to reduce the impact of those uncertainties secondary reserves short-term securities held by banks to increase their liquidity self-insurance setting aside money to cover a potential financial loss share dividends stock that is given to stockholders as a return on their investment, often in place of cash shareholders' equity a firm's net worth; the amount of money that individuals have invested in the firm; the sum of stock, paid-in capital, and retained earnings short position the sale of borrowed securities in anticipation of a price decrease speculative risk a situation with the possibility of either financial loss or gain spread the difference between the bid and ask prices standard deviation a measure of dispersion around an average value; a measure of risk statement of cash flows a financial statement summarizing the amount of money that is coming into and going out of a firm stock split a recapitalization achieved by changing the number of shares outstanding

stocks the capital raised by a firm through the issue of shares, which also gives their holders ownership of the company sukuk a Shariah-compliant bond-like instrument used in Islamic finance representing a direct asset ownership interest term structure of interest rates the relationship between yields and the time to maturity for debt with a given level of risk time series analysis evaluation of a firm's financial performance over a period of time time value of money increases in an amount as a result of its earnings over time times interest-earned ratio of operating income (EBIT) to interest expense: measure of the safety of a debt instrument total asset turnover ratio of sales to everything that a firm owns; a measure of the amount of assets that a firm has which is required to generate sales tradable rights the entitlement to subscribe to new shares listed during a capital increase, such as the sale of new stock shares treasury shares stock held by the company for use as employee stock uncontrollable risks uncertainties that cannot be influenced by human action underpriced an item that costs less than its worth undiversifiable risk (systematic risk! uncertainties associated with fluctuations in securities prices and other non firm-specific factors: market uncertainty that is not reduced through the construction of diversified portfolios وزارة التصليدر ' 921-19 GLOSSARY 363

Pl ' L:|34)| 364ly Business Finance valuation process of determining what an asset is currently worth variable Interest rate bonds long term debt instruments whose interest payments vary with changes in short-term interest rates or the Consumer Price Index vertical analysis a method for analyzing accounting data by reading down a single column in a financial statement and determining how each individual line items in the statement relates to another base figure in the report weighted average cost of capital the mean of the costs of debt, shares in a firm that pay dividends, and common stock yield the return on a stock expressed as dividend per share divided by the current share price yield curve a graph relating interest rates and the term to maturity zero.coupon bonds a form of loan that is initially sold at a discount and on which interest accrues and is paid at maturity