Real
Risk-Free Rate of Interest, k*
The rate
of interest that would exist on default-free U.S. Treasury securities
if no inflation were expected.
Realized
Rate of Return, -k
The return
that was actually earned during some past period. The actual return
(-k) usually turns out to be different from the expected return (^k).
Red-Line
Method
An inventory
control procedure in which a red line is drawn around the inside of
an inventory-stocked bin to indicate the reorder point level.
Regular,
or Simple, Interest
The situation
when interest is not compounded, that is, interest is not earned on
interest.
Reinvestment
Rate Assumption
The assumption
that cash flows from a project can be reinvested (1) at the cost of
capital, if using the NPV method, or (2) at the internal rate of return,
if using the IRR method.
Reinvestment
Rate Risk
The risk
that a decline in interest rates will lead to lower income when bonds
mature and funds are reinvested.
Reinvestment
Rate Risk
The risk
that a decline in interest rates will lead to a decline in income from
a bond portfolio.
Relaxed
Current Asset Investment Policy
A policy
under which relatively large amounts of cash, marketable securities,
and inventories are carried and under which sales are stimulated by
a liberal credit policy, resulting in a high level of receivables.
Relevant
Cash Flows
The specific
cash flows that should be considered in a capital budgeting decision.
Relevant
Risk
The risk
of a security that cannot be diversified away, or its market risk. This
reflects a security's contribution to the riskiness of a portfolio.
Repatriation
of Earnings
The process
of sending cash flows from a foreign subsidiary back to the parent company.
Replacement
Analysis
An analysis
involving the decision of whether or not to replace an existing asset
with a new asset.
Replacement
Chain(Common Life)Approach
A method
of comparing projects of unequal lives which assumes that each project
can be repeated as many times as necessary to reach a common life span;
the NPVs over this life span are then compared, and the project with
the higher common life NPV is chosen.
Required
Rate of Return, ks
The minimum
rate of return on a common stock that a stockholder considers acceptable.
Reserve
Borrowing Capacity
The ability
to borrow money at a reasonable cost when good investment opportunities
arise . Firms often use less debt than specified by the MM optimal capital
structure to ensure that they can obtain debt capital later if they
need to.
Residual
Dividend Model
A model
in which the dividend paid is set equal to the actual earnings minus
the amount of retained earnings necessary to finance the firm's optimal
capital budget.
Residual
Value
The value
of leased property at the end of the lease term.
Restricted
Current Asset Investment Policy
A policy
under which holdings of cash, securities, inventories, and receivables
are minimized.
Retained
Earnings
That portion
of the firm's earnings that has been saved rather than paid out as dividends.
Return
on Common Equity (ROE)
The ratio
of net income to common equity; measures the rate of return on common
stockholders' investment.
Return
on Total Assets (ROA)
The ratio
of net income to total assets.
Revaluation
The process
of officially increasing the value of a country's currency relative
to other currencies.
Revolving
Credit Agreement
A formal,
committed line of credit extended by a bank or other lending institution.
Risk
In a financial
market context, the chance that an investment will not provide the expected
return.
Risk
The chance
that some unfavorable event will occur.
Risk
Aversion
Risk-averse
investors dislike risk and require higher rates of return as an inducement
to buy riskier securities.
Risk
Management
Involves
the management of unpredictable events that have adverse consequences
for the firm.
Risk
Premium, RP
The difference
between the expected rate of return on a given risky asset and that
on a less risky asset.
Risk-Adjusted
Discount Rate
The discount
rate that applies to a particular risky stream of income; the riskier
the project's income stream, the higher the discount rate.
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