Cost Of Equity And Debt Flashcards
What is the cost of capital for investors?
The return that investors require from their investment.
What is the cost of equity?
The return required by shareholders for their investment.
What is the cost of debt?
The yield required by holders of debt capital.
What is the weighted average cost of capital (WACC)?
The average cost of all sources of capital, weighted by their proportions in the company’s capital structure.
How does the cost of capital for companies differ from that for investors?
It differs due to the varying tax positions of investors and companies.
What is the average cost of capital?
The overall cost of capital calculated by averaging the costs of all sources of capital.
What is the marginal cost of capital?
The cost of the next increment of capital raised by the company.
Why is the cost of equity higher than the cost of debt?
Equity investment is riskier than debt capital investment.
What is the relationship between investment projects and WACC?
Investment projects should earn returns equal to or in excess of the WACC.
What rights do providers of debt capital have?
They have a contractual right to receive interest and repayment of principal on schedule.
What happens if a company defaults on debt payments?
Providers of secured debt can enforce their security.
