Week 6 Flashcards
EBITDA
Earnings before interest, taxes, depreciation and amortization
EBIT
Earnings before interest and taxes
Financial distress
Promises to creditors are broken/ honored with difficulty
Trade-off theory
Theoretical optimum is reached when present value of tax savings is ofsett by increases in present value of costs of distress
Right to default
When a firm gets in trouble, stockholders can walk away
Administratively insolvent
Almost nothing for creditors and comapny is running out of cash to pay legal expenses
Debt-equity decision
Tradeoff between interest tax shield and cost of financial distress
Current assets
Assets that are most likely to be turned into cash in the near future
Liabilities
Money owed by the company
Net working capital
Roughly measures company’s potential reservoir of cash
Book value
Shareholders’ cumulative investment
Market value added
Difference between market value and amount that shareholders invested
Market-to-book ratio
How much money has been added for each dollar that shareholders have invested
Cost of capital
Minumim acceptable rate of return on capital investment
Economic value added
Profit after deducting all costs, including cost of capital
