Unit 6: Cost of Capital Flashcards
What is a rights offer?
A public issue of securities in which securities are first offered to existing shareholders. Also called a rights offering.
What is a general cash offer?
An issue of securities offered for sale to the general public on a cash basis
What does OSC stand for?
Ontario Securities Commission
On the most basic level, if a firm’s WACC is 12 %, what does this mean?
It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this, value is created.
Theoretically, this would be same as a $0 NPV or the IRR
What does WACC stand for?
Weighted Average Cost of Capital (WACC)
True or false
Building a prototype is part of the first-stage financing of venture capital
True
True or false
Whether a firm raises capital by debt or requity depends on the size of the firm, its life cycle stage and its growth prospects
True
What is cost of debt?
The return that lenders require on the firm’s debt.
What is Weighted Average Cost of Capital (WACC)?
The weighted average of the ocsts of debt and equity.
What does TSX stand for?
Toronto Stock Exchange
What is a prospectus?
Legal document describing details of the issuing corporation and the proposed offering to potential investors
What is a red herring?
A preliminary prospectus distributed to prospective investors in a new issue of securities.
Selling a portion of the firm is called _____ financing.
Equity
_______ _______ refers to financing for new, often high risk ventures.
Venture capital
True or false
If you can borrow all the money you need for a project at 6% then your cost of capital is 6%
False.
Cost of capital depends on risk of the project not the source of the money.
True or false
The cost of capital for an investment depends primarily on how and where the capital is raised
False
What is Venture Capital?
Financing for new, often high-risk ventures.
The cost of capital for an investment depends on the ____ of that investment.
risk
True or false
The terms below can all be used interchangably
- required return
- appropriate discount rate
- cost of capital
True
Which is consider the industry best practice for estimating cost of equity?
- Dividend Growth model approach
- Security Market Line (SML) approach
SML approach
True or false
Private equity firms provide financing for start-up firms which otherwise will have difficulty raising capital
True
What is a public issue?
The creation and sale of securities on public markets
What is the Securities Act?
Ontario legislation that sets forth the regulations for all new securities isses in the province including the Toronto Stock Exchange (TSX).
What are the 5 key considerations when choosing a venture capitalist.
- Financial Strength of the venture capitalist
- Style of the venture capitalist
- References of the venture capitalist (reputation)
- Contacts of the venture capitalist (network)
- Exit Strategy
The cost of capital depends on the (use / source) of the funds
Use
If you had to choose between using book values for either debt or equity when calculating WACC, which would you choose and why?
Debt, because debt book values are more likely to be closer to market values.
What is cost of equity?
The return the equity investors require on their investment in the firm.
Borrowing money to finance a firm is called ____ financing.
Debt
