Chapter 5 - Calculating the Cost of Raising Capital Flashcards Preview

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Flashcards in Chapter 5 - Calculating the Cost of Raising Capital Deck (15):
1

What are the three forms of risks?

-Operational risk
-Risk of illiquidity
-Financial risk

2

What theory explains how the market is able to accurately reflect a firm's risk?

Efficient Market Theory

3

What are the two forms of debt?

-Loans
-Bonds

4

What is the return that is earned on a bond referred to as?

Yield to Maturity (YTM)

5

What is the call price referred to as?

The strike price

6

What defines a risk premium and quantifies a company's risk premium by relating the historical returns of that company, or the industry in which it competes, to the performance of the market as a whole?

Capital Asset Pricing Model (CAPM)

7

What are two popular financial instruments which share characteristics of debt and equity?

Preferred stock and convertibles

8

What are conversions which require the investor's consent referred to as?

Voluntary

9

What are conversions which do not require the investor's consent referred to as?

Involuntary

10

What is the discount rate a firm uses to evaluate investments?

Hurdle Rate

11

What is the rate of interest that the investor will earn based on the price paid for the bonds and the coupon payments that will be received?

Yield to Maturity (YTM)

12

What is the most simplistic version of equity?

P/E Inversion

13

What is P/E Inversion?

Projected Earnings Per Share divided by the stock price

14

What uses dividends instead of EPS as a measure of return and adds growth constant consisting of the projected increase in retained earnings?

Dividend Growth Model

15

What is a third model which measures the cost of equity using the risk-free rate and a risk premium?

Capital Asset Pricing Model (CAPM)