Unit 7 Flashcards
From a financial point of view, the goal of a company is to _____________.
maximize the stockholders’ wealth
return or profitability of an investment is ______________.
the average increase in wealth produced by an investment per invested monetary and time unit
Return =
(total amount at the end of the term - original investment) / original investment
Cost of capital of a project is defined as _____________.
the minimum return necessary to make the project worthwhile
The profitability of a project is _______________.
the return the project actually yields
The difference between the profitability of a project and the cost of capital is ______________–.
The profitability of a project is the return the project actually yields and the cost of capital is the return the project should yield to be worthwhile
The return on an investment will be used to remunerate
both the providers of equity capital and the providers of debt capital
The cost of capital will depend on how ________________ due to ________________.
the investment is funded
The return on the investment being used to remunerate both the providers of equity capital and the providers of debt capital
The cost of capital of a project will depend on the following two costs of capital:
- Cost of debt capital
2. Cost of equity capital
Cost of debt capital is ______________ and is explicitly determined by _____________.
the return required by the debt holders of the company.
the conditions of the debt contracts
Cost of equity capital is _______________.
the minimum return required by the stockholders of a
company.
The cost of debt capital is different from the cost of equity in that ______________.
The cost of debt capital is not explicitly
determined but can be estimated as the rate of return of a similar investment
(that is , an investment with a similar risk level).
A similar investment is ___________.
an investment with a similar risk level
The cost of capital of a company at a given moment can be estimated as ________________.
the weighted average of the cost of equity capital and the cost of debt capital.
The increase in the value of the assets of the company is calculated as ____________.
∆A = R * A
where R = rate of return & A = assets
That variation in assets must be used to ______________, which is calculated as _______________.
pay the remuneration of the debt
I = D * KD
where D = debt & KD = cost of debt
After paying the remuneration of debt, the remaining assets would be the actual variation in the value of equity and calculated as ______________.
∆E actual = ∆A - I
where ∆A = increase in value of assets & I = variation in assets
Stockholders require a minimum increase in the value of their investments of ∆E required = ______________.
∆E required = E * Ke
where E = equity & Ke = cost of equity
For the stockholders’ wealth to remain unchanged, the actual variation in the value of equity should equal _______________ and can be represented by the formula ________________.
the required variation in the value of equity
∆E actual = ∆E required <=> RA - DKD = EKe <=> R = (EKe + D*KD) / A
where E = equity, Ke = cost of equity, D = debt, KD = cost of debt, & A = assets
For the stockholders’ wealth to remain unchanged, R =
(EKe + DKD) / A
where E = equity, Ke = cost of equity, D = debt, KD = cost of debt, & A = assets
The formula of the weighted average cost of capital (WACC) is ______________.
R = (EKe + DKD) / A
Let’s suppose that we lack our own capital and that we request a loan of 100 monetary units with a financial cost of 5% per year.
If we invest the 100 monetary units in the acquisition of an investment, what minimum profitability should we achieve in order not to reduce our wealth if the return on investment is 4%?
In this case, the value of our investment would
have increased to 104 monetary units, but the value of the liability we used to acquire it would
have increased to 105 monetary units. The result will be that our wealth has been reduced to a
value of -1.
We need a profitability of 5%
Let’s suppose that we lack our own capital and that we request a loan of 100 monetary units with a financial cost of 5% per year.
If we invest the 100 monetary units in the acquisition of an investment, what personal profitability would we achieve if the profitability of the investment is 7%?
The value of the investment would have amounted to 107 monetary units, so that by returning the 105 of the liabilities, our wealth would have amounted to 2 monetary units.
The profitability is 2%
Let’s suppose that we lack our own capital and that we request a loan of 100 monetary units with a financial cost of 5% per year.
If we invest the 100 monetary units in the acquisition of an investment and the return on investment is 5%, what minimum profitability should we achieve in order not to reduce our wealth?
The final value of the investment (105 monetary units)
will be equal to that of the liabilities (105 monetary units), so that our wealth will remain unchanged.
We need a profitability of 5%
The WACC (weighted average cost of capital) indicates ___________________.
the cost of capital at a given moment of time
In capital budgeting, the proportions of debt and equity in the financing of an investment usually _________-. Consequently, we will estimate the cost of capital using an alternative method, which is ________________.
vary over time
the calculation of the rate of interests of the financial
structure of the company
the rate of interests of the financial structure of a company is _________________.
the rate that where the cash-inflows from the financial operations equal to the cash-outflows from the financial operations
The mínimum profitability that should be obtained with the investment project is the ______________.
cost of capital of the project
The cost of capital of a project is minimum profitability that should be obtained with the investment project so that ________________.
if the profitability of the project does not
exceed the cost of capital, the project will reduce the wealth of the shareholders and, consequently, not be a desirable project.
Cash-inflows are assigned _________ values.
positive
Cash out-flows are assigned ________ values.
negative
When we have different sources of financing for a project, we add all the cash-flows in a global cash-flow that will be the ____________, and we use this __________ to calculate the cost of capital (K) of the financing project.
global cash-flow of the financial structure
global cash-flow of the financial structure
