Profitability Analysis is the analysis of the determinants of return on common equity

(ROCE).
Favorable Operating Liability Leverage is an increase in return on net operating assets
over return on operating assets, induced by operating liabilities
Favorable Financial Leverage (Or Favourable Gearing) is an increase in ROCE over
RNOA, induced by borrowing
call option is a claim that gives the holder the right, but not the obligation to buy shares at a
particular price (the exercise price).
convertible securities are securities (such as bonds and preferred stock) that can be
converted into common shares if conditions are met, but which have additional claims also
payout is amounts paid to shareholders. The term is sometimes used to refer only
to dividends, sometimes to dividends and stock repurchases.
put option is a claim that gives the holder the right, but not the obligation, to
sell shares at a particular price (the exercise price
Accounting Value Added is (accounting) earnings in excess of that required for book value
to earn at the required return. Compare with Economic Value Added.
Liquidation Of Hidden Reserve is an increase in income that arises from slowing
investments in assets that have been measured with conservative accounting.
Incentive option are employee stock option that are not txed to the employee on eercisw and
are not tax deductable
Liberal Accounting is accounting that overstates (or gives relatively higher) assets on the
balance sheet or understates liabilities. Compare with Conservative Accounting
Neutral Accounting or Normal Accounting is accounting that yields an accounting rate of
return equal to the required return for investments that add no (economic) value.
Economic Value Added is value generated from investment in excess of that to compensate
for the required return on the investment. Compare with Accounting Value Added.
Operating income(enterprise income,NOPAT net operating profit after tax) is income
from a firms business of selling product snd servise
Required Return or Cost Of Capital is the return that an investor demands to compensate
for risk. Compare with expected return.
Skewed Distribution of outcome is one that has higher probability in one extreme than the
other.

Systematic Risk or NonDiversifiable Risk is the risk that can be diversified away in a
portfolio. Compare with Usystematic Risk
Unsystematic Risk or Diversiable Risk is the risk that can be diversied away in portfolio.
Compare with Systematic Risk
Upside Potential is the probability of yielding extremely high return. Compare with
downside risk.
Fundamental Risk is the risk that is generated by business activities. Compare with Price
Risk.
Growth Option is the ability to grow assets (and profits) if an opportunity arises.
Liquidity Risk is the risk of not finding a buyer or seller at the intrinsic value
Expected Return is the return that an investors anticipates earnings from buying at the
current market price.
Distribution Of Return is the set of possible outcome that an investor faces with
probabilities assigned to those outcome
Adaptation Option is the ablity to alter the business after a bad outcome
sensitivity analysis tests how value changes with different forecasts of the future or with
different measures of the required return. enterprise value is the value of the operations.
financing risk is the risk shareholders have of losing value in borrowing and lending
activities.
financial planning is planning to arrange financing to meet the future cash flow
needs of the business. 346
liquidity analysis is the analysis of current and future cash relative to the claims on cash.
conservative accounting The practice of understating book values,But just as
future RNOA and ROCE can be increased by writing down net assets, so can they be
decreased
by writing assets up.
liberal accounting. Writing up assets (or failing to write them down when they are impaired)
A benchmark that draws the line between conservative and liberal accounting is neutral
accounting. This is accounting that yields an expected return on equity equal to the cost of
capital, and thus zero residual income, for investments that do not add value.
Conservative and liberal accounting, in

contrast, yield profitability that is different from the required return when there in fact is no
value added. Conservative accounting produces higher future profitability than the required
return; liberal accounting lowers future profitability.
Liberal Accounting is accounting that overstates (or gives relatively higher) assets on the
balance sheet or understates liabilities
Neutral Accounting or Normal Accounting is accounting that yields an accounting rate of
return equal to the required return for investments that add no (economic) value.
Aggressive accounting is accounting that recognizes more current income than alternative
accounting method
Audit quality refers to the intregrity of the audit in ensuring that generally accepted
accounting principle
Banking or saving income for the future refers to the practice of reducing current income
and deffering it to the future
Bigbath accounting is acconting that reduce current income (usually by large amount)
Disclosure quality is the degree to which financial statement and their footnotes give the
detail necessary analyze them.
Earning management is the practice of shifting earning between periods
Earning quality refers to the ability of current earnings to forecast future earnings.
Expenditure timing is the practice of timing expenditure to selected accounting periods
GAAP application quality is the degree to which a firm uses gaap accounting to give a true
and fair view of the firm activities a firm can use accounting methods available within gaap
to give distorting view of the firm
Lifo dipping is the practice of reducing lifo inventories to increase current income by the
liquidation of lifo reserve
Quality diagnosis is a measure that raises questions as to the quality of accounting in
financial statement
Reversal property of accounting refers to a feature whereby higher (lower) current earnings
will result in lower (higher) earnings in the future
Transaction quality refers to the amount of transaction timing involved in determining
reported earnings
Transaction timing refers to the practice or arraging a firms business around the accounting
rules so as to recognize transactions in particular accounting period.

Collateral refers to asset that can be reposseded if a debitor defaults

Credit analysis or default analysis is analyzes information to determine the likelihood of a
borrower
Default is a failure to make timely payments on debt or other violation of agreement
Default risk or credit risk is the risk that a debtor will default
Default scenario is a forecast under whicj a firm defaults
Default strategy or planning is a strategy to deal with default
Yield to maturity is the rate that discounted the epected (coupon and maturity) cash flows of
a bond and its market price