Definition of EVA
See economic value added.
A devaluation that is designed to cheapen a nation's currency and thereby
increase its exports at other countries' expense and reduce imports. Such devaluations often lead to trade wars.
The time interval over which a money manager's performance is evaluated.
The Modigliani and Miller theorem that a firm's capital structure is irrelevant to the firm's
The evaluation of a manager's performance which involves, first, determining
whether the money manager added value by outperforming the established benchmark (performance
measurement) and, second, determining how the money manager achieved the calculated return (performance
An increase in the foreign exchange value of a currency that is pegged to other currencies or gold.
Operating profit, adjusted to remove distortions caused by certain accounting rules, less a charge
to cover the cost of capital invested in the business.
The cost that is relevant to a particular decision – future, incremental cash flows.
The upper and lower levels of activity within which the business expects to be operating within the short-term planning horizon (the budget period).
a measure of the extent to which income exceeds the dollar cost of capital; calculated
as income minus (invested capital times the cost of capital percentage)
the process of determining the degree
of success in accomplishing a task; it equates to both
effectiveness and efficiency
a cost that is logically associated with a specific problem or decision
a process that compares, to the extent possible
and practical, the incremental revenues and incremental costs of alternative decisions
the specified range of activity over which a
variable cost per unit remains constant or a fixed cost remains
fixed in total; it is generally assumed to be the normal
operating range of the organization
Term used by the consulting firm Stern Stewart for profit remaining after deduction of the cost
of the capital employed.
MM dividend-irrelevance proposition
Theory that under ideal conditions, the value of the firm is unaffected by dividend policy.
MM's proposition I (debt irrelevance proposition)
The value of a firm is unaffected by its capital structure.
Fall in the government-determined fixed exchange rate.
Automated storage/retrieval system
A racking system using automated systems
to load and unload the racks.
Date on which particular news concerning a given company is announced to the public.
Used in event studies, which researchers use to evaluate the economic impact of events of interest.
Markets in which the prevailing price is determined through the free interaction of
prospective buyers and sellers, as on the floor of the stock exchange.
BARRA's performance analysis (PERFAN)
A method developed by BARRA, a consulting firm in
Berkeley, Calif. It is commonly used by institutional investors applying performance attribution analysis to
evaluate their money managers' performances.
Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.
An international trade policy of competitive devaluations and increased protective
barriers where one country seeks to gain at the expense of its trading partners.
The return an investment manager is compared to for performance evaluation.
A system that monitors and evaluates the performance of a fixed-income portfolio , as well as the
individual securities held in the portfolio. BONDPAR decomposes the return into those elements beyond the
manager's control--such as the interest rate environment and client-imposed duration policy constraints--and
those that the management process contributes to, such as interest rate management, sector/quality allocations,
and individual bond selection.
Builder buydown loan
A mortgage loan on newly developed property that the builder subsidizes during the
early years of the development. The builder uses cash to buy down the mortgage rate to a lower level than the
prevailing market loan rate for some period of time. The typical buydown is 3% of the interest-rate amount
for the first year, 2% for the second year, and 1% for the third year (also referred to as a 3-2-1 buydown).
The percentage by which the conversion price in a convertible security exceeds the
prevailing common stock price at the time the convertible security is issued.
In the balance of payments, counterpart items are analogous to unrequited transfers in the
current account. They arise because the double-entry system in balance of payments accounting and refer to
adjustments in reserves owing to monetization or demonetization of gold, allocation or cancellation of SDRs,
and revaluation of the various components of total reserves.
The return realized on a portfolio for any evaluation period, including (1) the change in market
value of the portfolio and (2) any distributions made from the portfolio during that period.
Dollar-weighted rate of return
Also called the internal rate of return, the interest rate that will make the
present value of the cash flows from all the subperiods in the evaluation period plus the terminal market value
of the portfolio equal to the initial market value of the portfolio.
The Securities & Exchange Commission uses Electronic Data Gathering and Retrieval to transmit
company documents such as 10-Ks, 10-Qs, quarterly reports, and other SEC filings, to investors.
Efficient Market Hypothesis
In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
Expectations hypothesis theories
Theories of the term structure of interest rates which include the pure
expectations theory, the liquidity theory of the term structure, and the preferred habitat theory. These theories
hold that each forward rate equals the expected future interest rate for the relevant period. These three theories
differ, however, on whether other factors also affect forward rates, and how.
Expectations theory of forward exchange rates A theory of foreign exchange rates that holds that the
expected future spot foreign exchange rate t periods in the future equals the current t-period forward exchange
The return expected on a risky asset based on a probability distribution for the possible rates
of return. Expected return equals some risk free rate (generally the prevailing U.S. Treasury note or bond rate)
plus a risk premium (the difference between the historic market return, based upon a well diversified index
such as the S&P500 and historic U.S. Treasury bond) multiplied by the assets beta.
Fair market price
Amount at which an asset would change hands between two parties, both having
knowledge of the relevant facts. Also referred to as market price.
The process of evaluating the investing and financing options available to a firm. It
includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in
the form of a financial plan, and then comparing future performance against that plan.
Security analysis that seeks to detect misvalued securities by an analysis of the firm's
business prospects. Research analysis often focuses on earnings, dividend prospects, expectations for future
interest rates, and risk evaluation of the firm.
Geometric mean return
Also called the time weighted rate of return, a measure of the compounded rate of
growth of the initial portfolio market value during the evaluation period, assuming that all cash distributions
are reinvested in the portfolio. It is computed by taking the geometric average of the portfolio subperiod
Relevant information about a company that has not yet been made public. It is illegal for
holders of this information to make trades based on it, however received.
evaluation of risky prospects based on the expected value and variance of possible outcomes.
Modern portfolio theory
Principles underlying the analysis and evaluation of rational portfolio choices
based on risk-return trade-offs and efficient diversification.
Modigliani and Miller Proposition I
A proposition by Modigliani and Miller which states that a firm cannot
change the total value of its outstanding securities by changing its capital structure proportions. Also called
the irrelevance proposition.
Perfect market view (of capital structure)
Analysis of a firm's capital structure decision, which shows the
irrelevance of capital structure in a perfect capital market.
Perfect market view (of dividend policy)
Analysis of a decision on dividend policy, in a perfect capital
market environment, that shows the irrelevance of dividend policy in a perfect capital market.
A set of procedures for evaluating a capital budgeting decision after the fact.
Also called external efficiency, a market characteristic where prices at all times fully
reflect all available information that is relevant to the valuation of securities.
A periodic review of a capital investment project to evaluate its continued economic viability.
An evaluation of credit quality Moody's, S&P, and Fitch Investors Service give to companies used by
investors and analysts.
The change in the value of a portfolio over an evaluation period, including any distributions made
from the portfolio during that period.
Reverse price risk
A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an
investor at rates prevailing at application but sets the note rates when the borrowers close. The lender is thus
exposed to the risk of falling rates.
The process of identifying and evaluating risks and selecting and managing techniques to
adapt to risk exposures.
Most term loans in the Euromarket are made on a rollover basis, which means that the loan is
periodically repriced at an agreed spread over the appropriate, currently prevailing LIBO rate.
Program by which a corporation buys back its own shares in the open market. It is usually
done when shares are undervalued. Since it reduces the number of shares outstanding and thus increases
earnings per share, it tends to elevate the market value of the remaining shares held by stockholders.
Stop order (or stop)
An order to buy or sell at the market when a definite price is reached, either above (on a
buy) or below (on a sell) the price that prevailed when the order was given.
The return of a portfolio over a shorter period of time than the evaluation period.
In performance measurement, the actual rate of return realized over some evaluation period. In
fixed income analysis, the potential return that considers all three sources of return (coupon interest, interest
on interest, and any capital gain/loss) over some i nvestment horizon.
A measure of the excess return per unit of risk, where excess return is defined as the
difference between the portfolio's return and the risk-free rate of return over the same evaluation period and
where the unit of risk is the portfolio's beta.
Value additivity principal
Prevails when the value of a whole group of assets exactly equals the sum of the
values of the individual assets that make up the group of assets. Stated differently, the principle that the net
present value of a set of independent projects is just the sum of the net present values of the individual projects.
Costs that do not change with increases or decreases in the volume of goods or services
produced, within the relevant range.
acid test ratio (also called the quick ratio)
The sum of cash, accounts receivable, and short-term marketable
investments (if any) is divided by
total current liabilities to compute this ratio. Suppose that the short-term
creditors were to pounce on a business and not agree to roll over the
debts owed to them by the business. In this rather extreme scenario, the
acid test ratio reveals whether its cash and near-cash assets are enough
to pay its short-term current liabilities. This ratio is an extreme test that
is not likely to be imposed on a business unless it is in financial straits.
This ratio is quite relevant when a business is in a liquidation situation
or bankruptcy proceedings.
capital investment analysis
Refers to various techniques and procedures
used to determine or to analyze future returns from an investment
of capital in order to evaluate the capital recovery pattern and the
periodic earnings from the investment. The two basic tools for capital
investment analysis are (1) spreadsheet models (which I strongly prefer)
and (2) mathematical equations for calculating the present value or
internal rate of return of an investment. Mathematical methods suffer
from a lack of information that the decision maker ought to consider. A
spreadsheet model supplies all the needed information and has other
advantages as well.
extraordinary gains and losses
No pun intended, but these types of gains
and losses are extraordinarily important to understand. These are nonrecurring,
onetime, unusual, nonoperating gains or losses that are
recorded by a business during the period. The amount of each of these
gains or losses, net of the income tax effect, is reported separately in the
income statement. Net income is reported before and after these gains
and losses. These gains and losses should not be recorded very often, but
in fact many businesses record them every other year or so, causing
much consternation to investors. In addition to evaluating the regular
stream of sales and expenses that produce operating profit, investors
also have to factor into their profit performance analysis the perturbations
of these irregular gains and losses reported by a business.
mark to market
Refers to the accounting method that records increases
and decreases in assets based on changes in their market values. For
example, mutual funds revalue their securities portfolios every day based
on closing prices on the New York Stock Exchange and Nasdaq. Generally
speaking, however, businesses do not use the mark-to-market method
to write up the value of their assets. A business, for instance, does not
revalue its fixed assets (buildings, machines, equipment, etc.) at the end
of each period—even though the replacement values of these assets fluctuate
over time. Having made this general comment, I should mention
that accounts receivable are written down to recognize bad debts, and a
business’s inventories asset account is written down to recognize stolen
and damaged goods as well as products that will be sold below cost. If
certain of a business’s long-term operating assets become impaired and
will not have productive utility in the future consistent with their book
values, then the assets are written off or written down, which can result
in recording a large extraordinary loss in the period.
Refers to the ability of a business to pay its liabilities on time
when they come due for payment. A business may be insolvent, which
means that it is not able to pay its liabilities and debts on time. The current
ratio and acid test ratio are used to evaluate the short-term solvency
prospects of a business.
A cost that has been paid and cannot be undone or reversed.
Once the cost has been paid, it is irretrievable, like water over the dam
or spilled milk. Usually, the term refers to the recorded value of an asset
that has lost its value in the operating activities of a business. Examples
are the costs of products in inventory that cannot be sold and fixed
assets that are no longer usable. The book value of these assets should
be written off to expense. These costs should be disregarded in making
decisions about what to do with the assets (except that the income tax
effects of disposing of the assets should be taken into account).
a process of evaluating an entity’s proposed
long-range projects or courses of future activity for
the purpose of allocating limited resources to desirable
a responsibility center in which the manager has
the authority to incur costs and is evaluated on the basis
of how well costs are controlled
cost control system
a logical structure of formal and/or informal
activities designed to analyze and evaluate how well
expenditures are managed during a period
standard set at a level that reflects what
is actually expected to occur in the future period; it anticipates
future waste and inefficiencies and allows for them;
is of limited value for control and performance evaluation purposes
a technique used to determine the fixed
and variable portions of a mixed cost; it uses only the highest
and lowest levels of activity within the relevant range
a preestablished rate of return against which
other rates of return are measured; it is usually the cost of
capital rate when used in evaluating capital projects
a process of evaluating changes that
focuses only on the factors that differ from one course of
action or decision to another
management information system (MIS)
a structure of interrelated elements that collects, organizes, and communicates
data to managers so they may plan, control, evaluate
performance, and make decisions; the emphasis of the
MIS is on internal demands for information rather than external
demands; some or all of the MIS may be computerized
for ease of access to information, reliability of input
and processing, and ability to simulate outcomes of
performance management system
a system reflecting the entire package of decisions regarding performance measurement and evaluation
the second decision made in capital project evaluation in which projects are ranked according to their impact on the achievement of company objectives
the first decision made in evaluating capital
projects; it indicates whether a project is desirable based
on some previously established minimum criterion or criteria
(see also preference decision)
a decrease in units arising from an inherent characteristic
of the production process; it includes decreases
caused by evaporation, leakage, and oxidation
a model or budget against which actual results are
compared and evaluated; a benchmark or norm used for
planning and control purposes
a cost incurred in the past and not relevant to any
future courses of action; the historical or past cost associated
with the acquisition of an asset or a resource
Collectively, "greeks" refer to the financial measures delta, gamma,
lambda, rho, theta, and vega, which are sensitivity measures used in
Activity-based costing (ABC)
A cost allocation system that compiles costs and assigns
them to activities based on relevant activity drivers. The cost of these activities can
then be charged to products or customers to arrive at a much more relevant allocation
of costs than was previously the case.
The process of storing costs in one account and shifting them to other
accounts, based on some relevant measure of activity.
The excess of inventory listed in the accounting books of record, but which
no longer exists in the actual inventory. Its disappearance may be due to theft, damage,
miscounting, or evaporation.
efficient capital markets
Financial markets in which security prices rapidly reflect all relevant information about asset values.
A variable like GDP is measured in current dollars if each year's value is measured in prices prevailing during that year. In contrast, when measured in real or constant dollars, each year's value is measured in a base year's prices.
Davis-Bacon Act of 1931
A federal Act providing wage protection to nongovernment
workers by requiring businesses engaged in federal construction
projects to pay their employees prevailing wages and fringe benefits.
McNamara-O'Hara Service Contract Act of 1965
A federal Act requiring federal contractors to pay those employees working on a federal contract at
least as much as the wage and benefit levels prevailing locally.
Panel on Audit Effectiveness
A special committee of the Public Oversight Board that was created
to perform a comprehensive review and evaluation of the way independent audits of financial
statements of publicly traded companies are performed. The panel found generally that the
quality of audits is fundamentally sound. The panel did recommend the expansion of audit steps
designed to detect fraud.
A contra- or reduction account to deferred tax assets.
The valuation allowance represents that portion of total deferred tax assets that the firm judges is unlikely to be realized. The probability threshold applied in evaluating realization is 50%. That is, if it is more than 50% likely that some or all of a deferred tax asset will not be realized, then a valuation allowance must be set off against part or all of the deferred tax asset.
Any uncontrolled loss of inventory, such as through evaporation or theft.
The process of systematically evaluating information, to identify risks and issues relating to a proposed transaction.(i.e. verify that information is what it is proposed to be).
One who uses statistical information to evaluate the probability of future events and prices insurance products.
Person that uses various types of evidence to evaluate the insurability of a client.
evaluating and classifying potential risk of a client.
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