Flashcards in Process & Project Management, Globalization, Financial Risk Management, Decisions, & Valuation Deck (11):
-Equity security that conveys ownership.
-It does not require any payment, it does not mature and because it increases equity while having no effect on debt, it decreases the debt equity ratio & increases the credit-worthiness of the firm.
Floating-rate bonds would automatically adjust the return on a financial instrument to produce a constant market value for that instrument.
What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?
To reduce the coupon rate on the bonds being sold.
-Debt holders DO NOT have ownership interest.
-debt obligations require a periodic interest payment.
-They have ownership interest.
-Equity securities only pay income to their holders when dividends are declared at the discretion of the Board of Directors.
Short-term vs. long-term financing options
ST = result in lower interest rates but higher interest rate risks b/c rates will fluctuate more dramatically for ST issues than LT.
LT= credit risk will decrease b/c the company will seek refinancing less frequently & thereby have less credit risk/opportunity that the rates associated with debt will be changed unfavorably/financing will be denied together.
Formula for Price:
Price = Dividend/rate of return
PEG = (Po/Eo) / (G x 100)
Compute dividend in subsequent year:
Step 1: Pt = D(t+1)/(R-G)
Projected Stock price formula:
Po = PEG x E1 x G