Flashcards in SU7 - Financing Deck (5):
Through which methods can a firm finance its fixed assets?
1. Equity or
2. Long-term debt
What are the tax benefits of paying interest?
1. It is an expense item in the firm’s statement of financial performance
2. It reduces the earnings before tax (EBT) used in calculating the firm’s tax liability.
3. After tax cost of debt = interest rate x (1 - tax rate)
4. The dividends paid on ordinary shares come from the net income (EAT)
The firm's cost of capital is also referred to as what?
The required rate of return
Explain the Cost of Capital.
* The cost of capital depends on the proportion that each form of financing contributes to the total financing of a firm and the required rate of return on each form of financing.
* The cost of capital is a weighted average cost.