Flashcards in Financial Management 3 Deck (12):
What are the characteristics of a Junk Bond?
High interest rate
High default risk
What are debenture bonds?
Bonds unsecured by collateral
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
What is a Callable Bond?
Borrower can pay off debt early
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
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)
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
What is Weighted Average Cost of Capital?
A company uses this to determine the true cost of their capital
Debt costs 5%; 40% of Cap.
Equity costs 12%; 60% of Cap.
(5% x 40%) + (12% x 60%)
WACC : 9.2%
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.