| Term | Definition |
|---|
| CAPM (Capital Asset Pricing Model) | A modle used to estimate the required return on a firm's cost of capital. |
| Dividend Growth Model | Amodel used to estimate the cost of equity. |
| Weighted-Average Cost of Capital (WACC) | The weighted average of the cost of debt and the various equity components of the firm's capital structure. |
| Cost of Debt | The expected interest cost on new debt times one minus the marginal tax rate due to the fact that interest payments are tax deductible. |
| Cost of Preferred Stock | Determined by dividing the preferred dividend by the net issuance price for preferred stock. Not tax deductible. |
| Cost of Retained Earnings | The opportunity cost that stockholders of a firm could earn elsewhere if they made investments of comparable risk. This figure is imputed. |
| Cost of Equity | More expensive than the cost of debt since stockholders are subject to more risk than debt holders. Usually estimated by using the dividend growth model. |
| Optimal Capital Structure | Goal of firms is to minimize its weighted-cost of capital, tax shields for debt makes debt a very attractive component |
| Key elements of making capital structure decisions | Sales stability, asset structure, operating leverage, growth rate, profitability, taxes, and management attitude |
| Business Risk | The uncertainity associated with the ability to forecast EBIT due to such thing as sales variability and operating leverage |
| Credit Risk | The risk that receviables will not be collected in full on a timely basis |
| Company Risk | Risk that is specifically associated with a particular firm due to mix of products, new products, competition, patents and lawsuits |
| Default Risk | The risk that the borrower will be unable to make interest and/or principal payments as scheduled on the obligation. |
| Interest Rate Risk | The risk of holding fixed interest-bearing instruments such as a bond when interest rates are changing. |
| Liquidity Risk | The risk that an asset cannto be sold for market value on short notice. |
| Market Risk | The risk measured by the beta coefficient, associated with a security that cannot be eliminated by diversification. |
| Purchasing Risk | The risk that inflation will result in less purchasing power for a given sum of money. |
| Reinvestment Risk | The risk that interest rates will have declined when short-term investments must be rolled over. |
Combine with other sets
Share on Facebook
Share on MySpace
!