Capital structure Flashcards
What debt has the lowest after-tax cost?
Bonds
Weighted cost of capital (WACC) formula?
(cost of equity X % equity in capital structure) + ( weighted average cost of debt X the % debt in capital structure)
Capital Asset Pricing Model (CAPM) formula?
Cost of retained earnings = Risk free rate + [ Beta X ( market return - Risk free rate)]
CAPM formula
C = R + B (M -R)
Cost of equity for capital formula
AKA (DCF)
cost of retained earnings = cost of dividends per share/ Market price per share + Growth rate
Cost of preferred stock formula
cost of preferred stock = Preferred stock dividends/ Net proceeds of preferred stock
How do you calculate the preferred stock dividends?
Par value X % preferred stock
CAPM is used for?
Calculating the required rate of return on retained earnings (equity)
Earnings per share is not relevant when?
Determining the risk premium on a specific security.
Market rate of interest includes
Risk free rate of interest + inflation premium
Beta coefficient measures
non-diversifiable risk in CAPM ; volatility of a stock relative to the market
Beta coefficient equation
% change in stock price / % change in market price
Net Cost of debt formula
Effective interest rate net of tax
Discounted cash flow formula
cost of retained earnings = dividend at end of year / market price + growth
How do you calculate the Risk premium if not given
Market return - Risk Free Rate
The cost of debt most frequently is measured as
Actual interest rate minus tax savings
The cost of capital is the
Rate of return on assets that covers the cost associated with the funds employed
How to calculate dividend paid ?
Par value X % dividend
After-tax cost of debt equation ?
Pretax cost of debt X ( 1 - tax rate)
commercial paper
sold to high creditworthy companies ; generally does not have an active secondary market
Commercial paper market
A. avoids the expense of maintaining a compensation balance with a commercial bank
B. Provides a broad distribution for borrowing
C. accrues a benefit to the borrower because its name becomes more widely known.
The marketable security with the least default risk is?
U.S Treasury securities
will always return a positive 1% to investor
common stock
increases equity while having no effect on debt, thus decreasing debt to equity ratio increase the credit worthiness of the firm
Floating bonds maintains
constant market value
