Overall cards Flashcards
Preference shares
shareholders are entitled to a share of profits through preferred dividends – these are fixed and DONT CHANGE IN VALUE. Preference shareholders DONT HAVE VOTING RIGHTS to appoint Board of Directors, however. Calculated with Perpetuity c/r
Common shares
shareholders are entitled to a share of profits through dividends, but these can change and are not set. They also HAVE voting rights to appoint Board of Directors. Calculated with Dividend growth model Do(1-g)/r-g or FV all added up
companies two options with profit:
either distribute the profit to shareholders through dividends, or retain the profit to reinvest in the company.
Capital Budgeting
how management makes decisions regarding whether to accept or reject a project by considering the costs and benefits of a project.
three types of projects
- Expansion Project – looking to invest in new areas of business or new markets.
- New Product Project – considering introducing a new product in current businesses or markets.
- Replacement Project – deciding whether to replace assets in one business and with new ones.
Independent Project
this means taking on the project will not affect any other ones. You can invest in more than one
Mutually Exclusive
you cannot invest in another one if you invest in this project
three methods to decide whether a project should be taken on:
- Payback period
- Net Present Value (NPV)
- Internal Rate of Return (IRR)
Costs associated with Debt
Firms pay Interest
Costs associated with Equity
Firms pay Dividends
IRR
The return of the project. Reject IRR if it is less than the cost of capital. Accept if it is more.
One Difference between Share and Bond
The life of a share is forever, there is no maturity for an ordinary share.
