17.9: Key Terms
- Page ID
- 94781
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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