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8 Cards in this Set
- Front
- Back
Optimal Capital Structure |
Combination of debt and equity financing that minimizes the cost of capital |
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Cost of debt |
Consists of Interest Rate and Firm’s income tax rate |
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Cost of Preferred Stock |
Consists of Price of preferred stock and dividend paid by the preferred stock |
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Cost of Preferred Stock |
Dividends are not tax deductible Cost of preferred stock exceeds cost of debt Floatation costs increase cost of preferred stock |
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Cost of Common Stock |
An Opportunity Cost Interest Rate plus a risk premium |
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Cost of Capital |
Weighted average of Cost of debt Cost of preferred stock Cost of common equity |
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Optimal Capital Structure |
Best combination of sources of funds Minimizes cost of capital Takes advantage of cheaper debt without excessively increasing risk |
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Marginal Cost of Capital |
Cost of additional sources of finance Even at optimal Capital structure , marginal cost of capital may rise |