Chapter 14 Equity vs Debt Financing Flashcards
True or False
Unlevered Firm is All equity financed
True
True or False
Levered firm has debt
True
Leverage is
amount of debt a firm uses
Capital structure encompasses
Relative proportion of equity, debt, and other securities outstanding
Dilution
The idea that if the firm issues new shares, the cash flows generated by the firm must be divided
among a larger number of shares, thereby reducing the value of each individual share.
Homemade Leverage
When investors use leverage in their own portfolios to adjust the leverage choice made by the
firm.
Market Value Balance Sheet
A form of balance sheet that lists all assets and liabilities of the firm at their market values
instead of their historical costs as on a standard balance sheet.
Unlike a traditional balance
sheet, all assets and liabilities of the firm are included—even intangible assets such as reputation,
brand name, or human capital.
Leveraged Recapitalization
When a firm issues debt and uses the proceeds to repurchase a significant percentage of its
outstanding shares.
Levered Equity
Equity in a firm that also has debt outstanding
Net Debt
Since holding cash is essentially the opposite of having debt, the amount of debt a firm effectively
has is equal to its debt minus its cash and risk-free securities, which can be referred to
as its net debt.
Unlevered Beta
The market risk of a firm’s business activities, ignoring any additional risk due to leverage,
which is equivalent to the beta of the firm’s assets.
Unlevered Equity
Equity in a firm that has no debt outstanding.
Weighted Average Cost of Capital
The weighted average of the firm’s equity and debt cost of capital, which should equal the return
that is available on other investments with similar risk.
