Chapter 15 - Debt and Taxes Flashcards
What is the cost of debt?
The interest rate charged by the bank for giving you the loan
What is the cost of equity?
When an investor or you put money into the firm.
tax shield
the reduction in income taxes that results from taking an allowable deduction from taxable income.
VL means
total value of levered firm
VU means
means value of unlevered firm
WACC (after tax) represents
he cost of capital to the firm after including the benefits of the tax shield. It is lower than the pre-tax WACC
pre-tax WACC
shows the average return that is paid to the firm’s investors
recapitalization (or recap)
When a firm makes a significant change to its capital structure
Leveraged Recapitalization
when a firm issues a large amount of debt and uses the proceeds to pay a special dividend or to repurchase shares
