Alpha: See firm-specific risk for the definition of Alpha.

Beta: A measure of systemic risk of a stock; the tendency of a stock’s price to correlate with changes in a specific index.

Capital Asset Pricing Model (CAPM): The Capital Asset Pricing (CAPM) Model is the most widely used risk/return model used to calculate the equity cost of capital.

Covariance: A statistical measure of the variance of two random variables that are observed or measured in the same mean time period.

Discount Rate: The discount rate is the percentage rate required to calculate the present value of a future cash flow.

Diversifiable Risk: See firm-specific risk.

EV/EBIT: The EV to EBIT multiple is defined as the enterprise value divided by earnings before interest and tax.

EV/EBITDA: The EV to EBITDA multiple is defined as the enterprise value divided by earnings before interest, tax, depreciation, and amortization.

EV/Sales: The EV to sales multiple is defined as the enterprise value divided by sales (also called revenue or turnover).

Firm-specific Risk: Firm-specific risk is sometimes called unsystematic risk, specific risk, diversifiable risk or alpha. The category includes risks associated with a firm’s management team, operations, projects, products, profits, and so on.

Free Cash Flows to Equity: Free Cash Flows to Equity is the cash flow available for distribution to equity holders. If net borrowings remain unchanged, the formula is free cash flows to the firm – Interest Expense x (1 – Tax Rate).

Free Cash Flows to the Firm: This is the cash flow available for distribution among all the securities holders of an organization (i.e. debt holders, equity holders, etc.). The standard definition is EBIT x (1 – Tax Rate) + Depreciation & Amortization +/- Changes in Working Capital – Capital Expenditure. The can also be referred to as unlevered free cash flow.

Market Risk: Market Risk is often referred to as systematic risk, non-specific risk, non-diversifiable risk or beta. This category includes risks such as interest rates, the economic cycle, inflation, legislation and socio-economic developments.

Non-diversifiable Risk: See market risk.

Non-specific Risk: See market risk.

Price to Book: The price to book multiple is defined as the market capitalization (or equity value of common shares) divided by the book value of equity which is total common shareholders’ equity excluding preference shares and minority interest.

Price to Earnings: The Price to Earnings Multiple is defined as the market capitalization (or equity value of common shares) divided by the earnings belonging to common shareholders.

Risk Premium: Risk Premium is the excess return that the overall stock market provides over the risk-free rate.

Risk-free Rate: Most analysts use the yield on government bonds to determine the risk-free rate even though they are not entirely risk-free. This is because it is virtually impossible to get a truly risk free rate.

Specific Risk: See firm-specific risk.

Systematic Risk: See market risk.

Unsystematic Risk: See firm-specific risk.

Weighted Average Cost of Capital (WACC): The Weighted Average Cost of Capital (WACC) incorporates the individual costs of capital for each provider of finance (e.g. debt and equity), weighted by the relative size of their contribution to the overall pool of finance.