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Flashcards in Financial Management Deck (41)
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31

What are debenture bonds?

Bonds unsecured by collateral

32

What are subordinated debentures?

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

33

What are Redeemable Bonds?

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

34

What is a Callable Bond?

Borrower can pay off debt early

35

What is a Convertible Bond?

Lender can demand payment via company stock instead of money

36

What is a Sinking Fund?

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

37

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)

38

What is the advantage of Preferred Stock?

Hold dividend priority over common stock

39

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%

40

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.

41

How is Cost of Debt calculated?

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