Financial Management 3 Flashcards Preview

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Flashcards in Financial Management 3 Deck (12):
1

What are the characteristics of a Junk Bond?

High interest rate

High default risk

2

What are debenture bonds?

Bonds unsecured by collateral

3

What are subordinated debentures?

Debenture Bonds that will be repaid if any assets are left after liquidation of a company

4

What are Redeemable Bonds?

Provision in Bond contract allows demand of Bond payment under certain circumstances

5

What is a Callable Bond?

Borrower can pay off debt early

6

What is a Convertible Bond?

Lender can demand payment via company stock instead of money

7

What is a Sinking Fund?

Borrower deposits regular sums into an account that will eventually pay off the debt

8

What is the disadvantage of Common Stock in comparison to bonds?

Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)

9

What is the advantage of Preferred Stock?

Hold dividend priority over common stock

10

What is Weighted Average Cost of Capital?

A company uses this to determine the true cost of their capital

Example:
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%

11

What is CAPM?

A stock's expected performance is based on its beta (risk) compared to that of the stock market.

More risk : more expected return.

12

How is Cost of Debt calculated?

(Interest Expense - Tax Benefit) / Carrying Value of Debt