Capital Structure (B2:M1-2) Flashcards
which is a cheaper source of financing, debt or equity?
debt bc company receives tax deduction for interest paid
what are the 3 characteristics of the commercial paper market?
avoids expense of maintaining a compensating balance with a commercial bank
provides a broad distribution for borrowing
accrues benefit to borrower because its name becomes more widely known
market rate of interest on one-year T-bill = ?
RF rate of interest + inflation premium
what is the formula to compute net cost of debt?
effective interest rate net of tax
effective rate = .14
tax rate = .3
.14 * .7 = .098
market capitalization = ?
number CS outstanding x FMV per share
rank the following from highest risk to lowest risk:
US T-bills
negotiable CDs
banker’s acceptances
commercial paper
commercial paper
banker’s acceptances
negotiable CDs
US T-bills
what is the formula to compute after-tax cost of debt?
pretax cost of debt x (1 - tax rate)
total value of equity using sector P/E = ?
net income x P/E multiplier
financial leverage increases when…
when the debt-to-equity ratio increases
what is operating leverage?
degree to which a firm uses fixed operating costs, as opposed to variable operating costs
debt ratio
total liabilities / total assets
times interest earned
EBIT / total interest expense
formula for computing operating leverage.
fix cost / variable cost
