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1 Introduction to Corporate finance: the cost of capital and long-term financing
This is a preview. There are 23 more flashcards available for chapter 1
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What is the difference between debt and equity?Equity is debt that the company owns to shareholders, debt is what the company owes to external financers
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What is an unlevered firm?A firm that is financed solely through equity
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What 2 things can a company do with excess cash?1. Distribute it to shareholders in a form of cash dividend
2. Invest money in project and distribute future cash flows of these projects to shareholders -
What is the risk-free rate?The compensation for investors for the time value of money. It is the amount an investor will make if they invest in a risk-free project.
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What does the beta signify?The degree of volatility of an effect, compared to the market
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What 3 factors determine beta?1. Cyclicality of revenue (direct effect)
2. Operating leverage (amplifies 1.)
3. Financial leverage (amplifies 1.) -
What is cyclicality of revenue?It refers to the relation between firm performance and the business cycle. High degree of cyclicality --> high beta
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What is financial leverage?The degree to which a company uses debt to finance its activities. = the fixed cost of financing
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What are brokerage fees?The costs that are incurred when executing a trade, as it involves a 3rd party
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What is the bid-ask spread?The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept
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