Exam3_FC - The flashcards are formatted for printing Therefore the term on the left side of the card corresponds to the definition on the right

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Financing Decision Investment Decision
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Corporate finance decisions that include cost of capital and capital budgeting. Corporate finance decisions that include leverage, capital structure, and dividends.
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Financing Decision Investment Decision
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Corporate finance decision based on assets (current and fixed). Corporate finance decision based on liabilities and equity (current liabilities and capital structure).
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Rate of Return 1. Long-term debt 2. Preferred stock 3. Common equity
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Capital structure: The benefit of investing for investors.
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Cost of Capital Rate of Return
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For financial managers, the cost of raising funds that are needed to operate the firm. The rate of return for the firm; the cost of raising funds.
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Cost of Capital Bonds, Preferred Stocks, Common Stocks
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Ways in which the firm can raise capital: Refers to the weighted rate of return for a firm (a weighted average cost of financing sources).
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Flotation Costs Cost of Debt
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The rate of return required by investors, adjusted for flotation costs and taxes. Any costs associated with issuing new bonds.
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Rate of Return; Flotation Costs Before-tax % Cost of Debt * (1 – Marginal Tax Rate)
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After-tax % cost of debt equation: Finding the cost of preferred stock is similar to finding the ____, except we have to consider ____ associated with issuing preferred stock.
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Price – Flotation Cost Dividend / Net Price
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Cost of preferred stock equation: Net price equation:
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Internal Common Equity Internal and External Common Equity
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Two sources of common equity: Common equity from retained earnings.
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External Common Equity External Common Equity
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Common equity from new common stock issue. Common equity that is more expensive because it has flotation costs.
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Dividend Growth Model Cost of Internal Equity
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Since the stockholders own the firm’s retained earnings, the cost is simply the stockholders’ required rate of return; if managers are investing stockholders’ funds, stockholders will expect Used to calculate the cost of common equity.
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to earn an acceptable rate of return.
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NP 0 Expected Returns = D 1 /NP 0 + g
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Dividend growth model equation: Net proceeds to the firm after flotation costs.
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Cost of Capital Cost of Capital
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This note was uploaded on 09/08/2011 for the course FIN 3403 taught by Professor Hill during the Fall '08 term at University of Central Florida.

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Exam3_FC - The flashcards are formatted for printing Therefore the term on the left side of the card corresponds to the definition on the right

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