638
Glossary
Profit plan: A company’s total budget used in achieving a desired profit goal. Some-
times the term refers only to the operating budget, and sometimes it is used synony-
mously with the term master budget.
Prospectus: Part I of a Registration Statement filed by a company offering its secu-
rities to the public, which Registration Statement is filed with and must be approved
by the Securities and Exchange Commission. The Prospectus describes the registering
company, its business and finances, and the risk factors the company faces.
Proxy: The grant by a shareholder to another party of the right to vote the stock-
holder’s shares of stock.
Proxy contest: An attempt to gain control of a corporation by soliciting shareholder
votes.
Purchase method: After the acquisition, the target firm’s assets are put on the bid-
der’s balance sheet at their fair market value.
Put option: An asset that gives the owner the right but not the obligation to sell
some other asset for a set price on or up to a specified date.
RAM: Random access memory is the hardware which a computer uses for storing
programs and data that the computer is currently using. In human terms, you can
think of RAM as the memory storing part of your brain. When you are thinking about
a problem, you are using your own RAM to work through various calculations and
thoughts.
Rate of return: An amount of income (loss) and/or change in value realized or
anticipated on an investment, expressed as a percentage of that investment.
Red herring: A preliminary, nonfinal Prospectus distributed by underwriters for
the purpose of generating interest in shares of stock to be offered to the public.
Registration statement: A filing made with the SEC by a company issuing its secu-
rities to the public, which describes the company and its financial condition. Part I
consists of the Prospectus.
Regulation FD: A Securities and Exchange Commission Regulation which among
other matters requires a company which purposely or inadvertently releases previ-

ROM) is a device from which you can play back music, but you cannot record your
own music to a CD ROM. (If you can record to a CD, the device is called a CD-R
(for recordable), not a CD ROM.)
Securities Act of 1933: The U.S. statute that permits the private placement or pri-
vate sale of securities without registration provided full and fair disclosure is made
and that requires the registration of public offerings of securities.
Securities and Exchange Commission (SEC): An agency of the U.S. government
which regulates the public issuance of securities under the Securities Act of 1933
and the conduct of trading markets and brokerage firms under the Securities Ex-
change Act of 1934, so as to protect investors from fraud and misleading or inade-
quate corporate and financial information.
Securities Exchange Act of 1934: The U.S. statute which established the Securi-
ties and Exchange Commission and regulates the operation of broker/dealers. Under
this statute, companies with publicly held securities are required to make periodic
reports to the public on various forms, most typically Forms 10-K, 10-Q, and 8-K. Of-
ficers, directors, and significant shareholders of publicly held companies are required
to report purchases and sales of securities and the formation of “groups” for the hold-
ing, voting, purchase, or sale of publicly traded securities.
Short: To enter a future or forward as the short party. Also known as “selling” the
future or forward.
Short party: The party in a forward or future contract that will deliver the under-
lying asset and receive payment (i.e., the selling party). The party in a forward or fu-
ture contract that benefits from a decline in the price of the underlying asset.
Single-step income statement: An income statement format that simply deducts
expenses and losses from revenues and gains in arriving at a single measure of income
from continuing operations.
Speculate: Attempt to profit by taking on a risk exposure.
Spot market: The market in which transactions are executed for immediate deliv-
ery of an asset.
Spot price: The price to be paid for immediate delivery of an asset or commodity.

in order to arrive at a sustainable earnings base.
Swap: An agreement between two parties to exchange cash flows over a period of
time. Cash flows are determined by an agreed upon formula specified in the swap
agreement—a formula that is contingent on the performance of other underlying
instruments.
Symmetric risk: An exposure that results in profits when an underlying price or
economic variable moves in one direction, and proportional losses if the variable
moves in the opposite direction.
Synergy: The incremental value generated by the combination of two or more firms.
Synthetic stock portfolio: A portfolio that consists of Treasury bills and a long
position in equity futures contracts. A properly constructed synthetic stock portfolio
behaves the same as a portfolio consisting of actual stocks.
Systematic risk: The risk that is common to all risky securities and cannot be elim-
inated through diversification. When using the capital asset pricing model, system-
atic risk is measured by beta.
Takeover: The transfer of corporate control from one group of shareholders to
another.
Target: A firm that is the subject of takeover or acquisition activities.
Tau: The amount of time remaining prior to an option’s expiration.
Taxable transaction: An acquisition in which the target firm shareholders are im-
mediately subject to capital gains on their sale of shares.
Glossary
641
Tax-adjusted nonrecurring items: Pretax nonrecurring items of revenue, gain,
expense, and loss that are multiplied by one minus a representative income tax rate.
The result is the after-tax effect of each of these items on net income.
Tax-free transaction: An acquisition in which the primary consideration paid to
the target’s shareholders is the acquirer’s common stock, thereby deferring capital
gains taxes until the new shares are sold.
TCP/IP: The communications standard that is used by the Internet. A protocol is

URL: Universal Resource Locator is the Internet address for a given Web site. The
URL for the president of the United States is www.whitehouse.gov.
Valuation date: The specific point in time at which the valuator’s opinion of value
applies (also referred to as “Effective Date” or “Appraisal Date”).
Variances: Measures of the difference between actual costs and standard costs.
They are favorable if costs are less than expected and unfavorable otherwise. Vari-
ances may be analyzed by the effect of changing prices (price variances) or changing
usage (quantity or usage variances).
642
Glossary
Vertical merger: A merger in which the two firms are from different stages of the
same industry or production process (e.g., an automobile manufacturer purchases a
steelmaker).
WA N : A wide area network is a connection of two or more computers which are geo-
graphically distant from each other. The typical purpose of a WAN is to send data or
communicate with distant facilities. Thus, an airline might have a WAN connecting
all of its airports world wide to allow for the quick communications of scheduling
changes between its various facilities.
Weighted average cost of capital (WACC): The cost of capital (discount rate) de-
termined by the weighted average, at market value, of the cost of all financing
sources in the business enterprise’s capital structure.
Windows NT or 2000: Quickly becoming the network operating system standard
of the industry. Developed by Microsoft.
Write an option: Sell an option. The writer is paid the option premium up front.
The writer of a call must later sell the underlying asset if the call option owner
exercises. The writer of a put must later buy the underlying asset if the put option
owner exercises. The writer of the option is essentially liable for any future payoffs
received by the option owner. Also known as shorting the option.