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17.9: Key Terms

Last updated

Mar 9, 2024
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- 17.8: Summary
- 17.10: CFA Institute

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after-tax cost of debt: the net cost of interest on a company’s debt after taxes; the firm’s effective cost of debt

capital: a company’s sources of financing

capital structure: the percentages of a company’s assets that are financed by debt capital, preferred stock capital, and common stock capital

conversion price: the face value of a convertible bond divided by its conversion ratio

conversion ratio: the number of shares of common stock receivable for each convertible bond that is converted

convertible bonds: bonds that can be converted into a fixed number of shares of common stock upon maturity

financial distress: when a firm has trouble meeting debt obligations

financial leverage: the debt used in a company’s capital structure

flotation costs: costs involved in the issuing and placing of new securities

interest tax shield: the reduction in taxes paid because interest payments on debt are a tax-deductible expense; calculated as the corporate tax rate multiplied by interest payments

levered equity: equity in a firm that has debt outstanding

net debt: a company’s total debt minus any cash or risk-free assets the company holds

preferred stock: equity capital that has a fixed dividend; preferred shareholders fall in between debt holders and common stockholders in the order of claimants

trade-off theory: a theory stating that the total value of a levered company is the value of the firm without leverage plus the value of the interest tax shield less financial distress costs

unlevered equity: equity in a firm that has no debt outstanding

weighted average cost of capital (WACC): the average of a firm’s debt and equity costs of capital, weighted by the fractions of the firm’s value that correspond to debt and equity

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