Ch.20 Financial Decisions and Management Flashcards
Discuss the concepts of optimal and target capital structure.
- Optimal - Mixture of LT debt and equity that produces the lowest overall WACC
- Target - Estimate by finacial managers for the best mix.
What are the advantages of financing with common stock?
- Stock does not obligate a company to make fixed payments to investors
- Stock does not have maturity
- Creates a cushion for creditors
What is the trade-off approach to the use of debt and equity financing in a company’s capital structure?
- Use of debt and equity to obtain the lowest WACC
What is operating risk, and how can it be measured?
- mix of variable and fixed costs in a companies operations
- how operating income responds to revenue changes.
In addition to the trade-off between the costs and benefits of using financial leverage, what other factors should be considered as part of determining a company’s target capital structure?
- Asset Structure
- Overall business risk
- Shareholder Control
- Profitability
- Market Conditions
What is a ratings trigger
- ratings that lenders use in financing agreements that require a company to maintain a certain credit rating
Discuss the issue of capital structure as it relates to not-for-profit organizations (NFPs).
- they cannot issue stock,
- can issue grants or charitable contributions to help offset costs
What are the reasons that private placement may be preferred over public issuance?
- Less restrictive covenants
- Relatively small issue size
- Reduced time to issuance
- Minimal reporting
- Lower costs
- Control over who holds the debt
- Greater flexibility with regards to terms and maturity
What are the four key characteristics of an optimal dividend policy?
- Maximizes shareholder value
- Retains sufficient profits to fund future asset expansion
- Distributes and appropriate amount of corporate income to investors
- Provides information to investors about the future earnings of the firm
What is a capital lease?
- Alternative form of gaining assets versus borrowing an purchasing
Why might a stock be delisted?
- fallen out of compliance
- Not following requirements and regulations
- self choosen
What are the four important dates relating to the payment of dividends?
- Declaration date: Board announcement
- Record Date: Holder of record date to receive/qualify
- Ex-dividend rate: Date stock is sold with out dividend entitlement
- Payment Date: Payout date
What is a DRIP?
Dividend Reinvestment Plan
- allows investors to reinvest their dividends into the company
What is a stock repurchase?
- Company buys back stock, reducing shares outstanding
What is a deemed dividend?
- Something that acts like a dividend and will be taxed
