Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
8 Cards in this Set
- Front
- Back
|
Optimal Capital Structure |
Combination of debt and equity financing that minimizes the cost of capital |
|
|
Cost of debt |
Consists of Interest Rate and Firm’s income tax rate |
|
|
Cost of Preferred Stock |
Consists of Price of preferred stock and dividend paid by the preferred stock |
|
|
Cost of Preferred Stock |
Dividends are not tax deductible Cost of preferred stock exceeds cost of debt Floatation costs increase cost of preferred stock |
|
|
Cost of Common Stock |
An Opportunity Cost Interest Rate plus a risk premium |
|
|
Cost of Capital |
Weighted average of Cost of debt Cost of preferred stock Cost of common equity |
|
|
Optimal Capital Structure |
Best combination of sources of funds Minimizes cost of capital Takes advantage of cheaper debt without excessively increasing risk |
|
|
Marginal Cost of Capital |
Cost of additional sources of finance Even at optimal Capital structure , marginal cost of capital may rise |
