B2-M1 Flashcards
Capital structure
The mix of debt (long-term and short-term) and equity (common and preferred) used to finance operations and growth
Commercial paper
- unsecured, short term debt instrument
- restricted by type of corp that can enter market
Market capitalization
=shares outstanding * FMV per share
Weighted Average Cost of Capital (WACC)
- hurdle rate for capital investment decisions
- optimal capital structure (maximizes value of the firm) is mix of financing types that produces the lowest WAAC
WACC formula
= Cost of equity%equity in capital structure / weighted avg cost of debt%debt in capital structure
*take into account tax effect for debt
Weighted Average Cost of Debt
=Effective annual interest payments/ Debt outstanding
- carries lowest cost of capital (least expensive)
- interest is tax deductible
Cost of Retained Earnings (cost of CS)
- Capital asset pricing model (CAPM)
- Discounted cash flow (DCF)
- Bond yield risk premium
CAPM formula
=Risk-free rate+[Beta*(Mkt return- RiskFree rate)]
Risk premium
=Beta*Market Risk Premium
Market Risk premium
=Beta*(Mkt return- RiskFree rate)
Beta coefficient=
volatility (risk) of the stock relative to the volatility of the overall market
Discounted Cash Flow formula
Cost of retained earnings
= (Dividend per share expected @ end of one yr/ Current mkt value or price of CS) + constant rate of growth in dividends
*current mkt value: subtract out flotation costs and underpricing
Cost of preferred stock
=Preferred stock dividends/ net proceeds of preferred stock
- dividends= par value* %
- net proceeds= Mkt value-fees/costs
After-tax cost of debt
=Pretax cost of debt* (1-tax rate)
Total market value of CS
Market capitalization
= # of shares outstanding * price per share (Mkt value)
-# of shares= total CS value (from balance sheet)/ Par value
