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18 Cards in this Set
- Front
- Back
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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 |
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financial risk |
portion of risk above normal business risk based on how the firm is financed |
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financial leverage |
extent to which fixed income securities (debt and preferred stock) are used |
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optimal capital structure |
mix of debt and equity that maximizes stock price |
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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 |
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signal theory |
assumes managers in firm know more than outsider investors, therefore we take every action by management as a signal about firm prospects |
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TIE |
times interest earned measures how safe the debt is like % of debt, interest rate, company profitability |
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dividend irrelevance |
firms' dividend policy has no effect on value or cost of capital |
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optimal dividend |
balance btwn current dividends and future growth |
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residual dividend policy |
dividend is set to earnings minus RE necessary for optimal capital budget, can't pay if they issue new stock |
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predictable/stable dividend |
specific dividend amount each year or predictable and stable increase |
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constant payout ratio |
same percentage of earnings paid out, dividends fluctuate with earnings |
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low regular plus extras |
low regular amount paid every year and bonus added when earnings are high |
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declaration date |
date firm declares dividends |
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holder of record date |
day firm decides who owns the stock and who gets the dividend |
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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 |
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DRIPs |
dividend reinvestment plan, enables stockholder to automatically reinvest dividends back into their stock |
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restraints on dividends |
contract restrictions, cant exceed RE, cash availability, IRS restrictions |
