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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

Floating bonds maintains

constant market value