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18 Cards in this Set

  • Front
  • Back

business risk

risk associated with projections of a firm's future ROA or ROE if the firm uses no debt, depends on sales and input price variability, ability to adjust price, and amount of fixed costs

financial risk

portion of risk above normal business risk based on how the firm is financed

financial leverage

extent to which fixed income securities (debt and preferred stock) are used

optimal capital structure

mix of debt and equity that maximizes stock price

trade off theory

interest is tax deductible and therefore less expensive than equity, but dividends are not. interest rates rise as debt/assets rises, trade off between tax savings and bankruptcy risk

signal theory

assumes managers in firm know more than outsider investors, therefore we take every action by management as a signal about firm prospects


times interest earned measures how safe the debt is like % of debt, interest rate, company profitability

dividend irrelevance

firms' dividend policy has no effect on value or cost of capital

optimal dividend

balance btwn current dividends and future growth

residual dividend policy

dividend is set to earnings minus RE necessary for optimal capital budget, can't pay if they issue new stock

predictable/stable dividend

specific dividend amount each year or predictable and stable increase

constant payout ratio

same percentage of earnings paid out, dividends fluctuate with earnings

low regular plus extras

low regular amount paid every year and bonus added when earnings are high

declaration date

date firm declares dividends

holder of record date

day firm decides who owns the stock and who gets the dividend

ex-dividend date

date the right to the next dividend no longer accompanies the stock in a sale, usually two days before holder of record date


dividend reinvestment plan, enables stockholder to automatically reinvest dividends back into their stock

restraints on dividends

contract restrictions, cant exceed RE, cash availability, IRS restrictions