Flashcards in Capital structure Deck (24):

1

## What debt has the lowest after-tax cost?

### Bonds

2

## Weighted cost of capital (WACC) formula?

### (cost of equity X % equity in capital structure) + ( weighted average cost of debt X the % debt in capital structure)

3

## Capital Asset Pricing Model (CAPM) formula?

### Cost of retained earnings = Risk free rate + [ Beta X ( market return - Risk free rate)]

4

## CAPM formula

### C = R + B (M -R)

5

##
Cost of equity for capital formula

AKA (DCF)

### cost of retained earnings = cost of dividends per share/ Market price per share + Growth rate

6

## Cost of preferred stock formula

### cost of preferred stock = Preferred stock dividends/ Net proceeds of preferred stock

7

## How do you calculate the preferred stock dividends?

### Par value X % preferred stock

8

## CAPM is used for?

### Calculating the required rate of return on retained earnings (equity)

9

## Earnings per share is not relevant when?

### Determining the risk premium on a specific security.

10

## Market rate of interest includes

### Risk free rate of interest + inflation premium

11

## Beta coefficient measures

### non-diversifiable risk in CAPM ; volatility of a stock relative to the market

12

## Beta coefficient equation

###
% change in stock price / % change in market price

13

## Net Cost of debt formula

### Effective interest rate net of tax

14

## Discounted cash flow formula

### cost of retained earnings = dividend at end of year / market price + growth

15

## How do you calculate the Risk premium if not given

### Market return - Risk Free Rate

16

## The cost of debt most frequently is measured as

### Actual interest rate minus tax savings

17

## The cost of capital is the

### Rate of return on assets that covers the cost associated with the funds employed

18

## How to calculate dividend paid ?

### Par value X % dividend

19

## After-tax cost of debt equation ?

### Pretax cost of debt X ( 1 - tax rate)

20

## commercial paper

### sold to high creditworthy companies ; generally does not have an active secondary market

21

## Commercial paper market

###
A. avoids the expense of maintaining a compensation balance with a commercial bank

B. Provides a broad distribution for borrowing

C. accrues a benefit to the borrower because its name becomes more widely known.

22

## The marketable security with the least default risk is?

###
U.S Treasury securities

will always return a positive 1% to investor

23

## common stock

### increases equity while having no effect on debt, thus decreasing debt to equity ratio increase the credit worthiness of the firm

24