Capital Structure Flashcards
(13 cards)
If firms can’t find positive NPV opportunities, they should distribute the money back to investors so they can invest their money elsewhere.
What are synonyms of cost of capital?
Required rate of return or hurdle rate
Of which two components does the cost of capital exist?
Cost of debt and cost of equity
Debt investors have lower required return rates because debt is less risky since it has a priority, fixed claim.
What is the weighted-average cost of capital (WACC)?
A measure that blends its costs of debt and equity to obtain a single cost of capital. The WACC is used as hurdle rate for NPV analysis!!!!!!
What kind of capital structure do issuers like in context of WACC?
One that minimizes the WACC and matches the duration of its assets.
What are determinants of the amount and type of financing needed for a firm?
Depends on business model and its position in the corporate life cycle
What is a capital-intensive business?
Businesses that require a lot of assets; real estate, transportation, utilities etc. Can be identified through low asset turnover, high capital expenditures to sales and high net-working-capital-to-sales ratios.
What are capital-light businesses?
Businesses with low capital needs like the technology sector
What is the corporate life cycle of a company?
Startup – Launching, high costs, low revenue.
Growth – Expanding, increasing revenue, scaling.
Maturity – Stable growth, peak profitability.
Decline – Market saturation, reduced profits.
Exit/Renewal – Reinvest, pivot, merge, or close.
What are top-down factors affecting the cost of capital?
Financial market conditions and industry conditions
What are issuer-specific factors?
Sales risks
Profitability risks
Financial leverage
Collateral type
Operating leverage = proportion of fixed costs to total costs
