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24 Cards in this Set
- Front
- Back
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Weighted Average Cost of Capital (WACC)
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(Aftertax cost of debt capital for Frim * Market Value Debt Ratio) + (Cost of Equity * Market VAlue Equity Ratio)
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Yield to Maturity Approach (Pre-Tax)
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the firm's pretax cost of debit
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Yield to Maturity Approach (After-Tax)
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the firm's pretax cost of debit * (1-Tax Rate)
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WACC in the Real World (Modifications)
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1.) Separately consider the cost of preferred equity (and market value of preferred equity) from cost of common equity (and market value of common equity)
2.) For Cost of Common Equity, use cost of retained earnings or cost of external equity |
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Cost of Preferred Equity
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Annual Preferred Dividend/Preferred Share Price
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Intersection of IOS and MMC Schedule
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shows optimal capital amount and MMC
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Cost of Capital (Beta consideration)
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1.) Select Comparables
2.) Estimate The Comparables Beta 3.) Unlever the Comparables Beta 4.) Level the Unlevered Beta for a Projects' Financial Risk |
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Unlever Beta Formula
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B(u,c)=B(l,c)/(1+((1-tax rate)*(debt(c)/equity(c))))
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Sovereign Yield Spread Developing Market
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YTM Developing Market Gov Bonds - YTM U.S. Treasury Bonds
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Country Risk Premium Developing Market
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Sovereign Yield Spread Developing Market * (Annualized Standard Deviation Developing Market Stock Index/Annualized Standard Deviation Developing Market Govern. Bond Index)
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Business Risk of Firm
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the risk inherent in the firm's operations with regard to furturn return on assets.
Includes quantity of sales and operating risk |
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Tax Position of Firm
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Tax Position of Firm relates to the effective tax rate of the firm.
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Primary Factors that influence Target Capital Structure Decision of Firm
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1.) Business Risk
2.) Tax Position 3.) Financial Flexibility 4.) Attitude Toward Debt |
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Increasing Debt in the Firm's Capital Structure
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1.) Positive Impact on EPS because of fewer common shares outstanding
2.) Also has negative impact of EPS because of greater interest expense. Overall, it is unclear |
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Increasing Debt rather than selling additional common shares
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1.) Positive impact on stock price because of increase EPS
2.) Negative Impact on stock price because of increase Cost of Equity (financial leverage) Overall, unclear on impact on stock price |
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Capital Budgeting Process Steps
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1.) Generating Good Investment Ideas
2.) Analyzing Proposed Investment Projects 3.) Planning the Capital Budget 4.) Monitoring and Post-Auditing |
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Capital Budget-ting Proposed Investment Project Categories
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1.) Expansion Investment Project
2.) Replacement Investment Project 3.) New Product or Service Investment Project 4.) Regulatory, Safety, or Environmental Investment Project |
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Capital Budgeting Assumptions
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1.) Decisions based on Projected Cash Flows
2.) Projected Cash Flows and Projected Timing are Accurate 3.) Projected Cash Flows Involve Opportunity Costs 4.) Projected Cash Flows are After Tax 5.) Projected Cash Flows do not include Financing Costs |
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Conventional Projected Cash Flow Pattern
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one or more projected initial cash flow, followed by more or more projected cash inflow(s)
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Non-Conventional Projected Cash Flow Pattern
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more than one change in sign
--> Results in difficulties in determining an internal rate of return |
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Capital Budgeting Project Interactions
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1.) Independent vs Mutually Exclusive Projects
2.) Project Sequencing 3.) Unlimited Funds v.s. Capital Rationing |
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Mutually Exclusive Projects
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two or more mutually exclusive capital investment projects, only 1 can be accepted
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Project Sequencing
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Different Projects may be scheduled to start at various points in time
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Capital Rationing Effect
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makes the accept or reject decision for capital investment projects more dependent on size of budget.
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