Weighted-average cost of capital (WACC)
the required rate of return on a firm's projects can be calculated using this; the after-tax return the company needs to earn in order to satisfy all of its security holders
Company cost of capital
the opportunity cost of capital for the firm's existing assets. The minimum acceptable rate of return when the firm expands by investing in average-risk projects.
Capital structure
the mix of long-term debt and equity financing (used to value new assets that have the same risk as the old ones)
Free Cash Flow
cash flow that is not required for investment in fixed assets or working capital and is therefore available to investors
Majority Voting
voting system in which each director is voted on separately
Cumulative Voting
voting system in which all votes that one shareholder is allowed to cast can be cast for one candidate for the board of directors
Proxy Contest
takeover attempt in which outsiders compete with management for shareholders' votes
Prime Rate
Benchmark interest rate charged by banks
LIBOR
London Interbank Offered Rate; the rate at which international banks lend to one another
Funded Debt
Debt with more than 1 year remaining to maturity
Unfunded Debt
debt due in less than one year
Sinking Fund
A fund established to retire debt before maturity
Callable Bond
o A bond that may be repurchased by a firm before maturity at a specified call price
Secured Debt
Debt that has first claim on specified collateral in the event of default
Subordinated Debt
Debt that may be repaid in bankruptcy only after senior debt is paid.
Eurodollars
Dollars held on deposit in a bank outside the United States
Eurobond
Bond that is marketed internationally
Private Placement
Sale of securities to a limited number of investors without a public offering.
Protective Covenant
Restriction on a firm to protect bondholders
Convertible Securities
give investors the option to alter their investments if they so choose
Warrant
The right to buy shares from a company at a stipulated price before a set date
Convertible Bond
A bond that the holder may exchange for a specified amount of another security
Angel investors
Investors who finance companies in their earliest stages of growth. Typically wealthy individual investors.
Corporate Venturers
Corporations that offer venture assistance to finance young, promising companies
Private equity investing
Investors who offer funds to finance firms that do not trade on public stock exchanges such as the NYSE or NASDAQ
Initial Public Offering
when a firm requires more capital than private investors can provide, it can choose to go public through an Initial Public Offering or IPO
Primary Offering
When new shares are sold to raise additional cash for the company
Secondary Offering
When the company's founders and venture capitalists cash in on some of their gains by selling shares
Underpricing
Issuing securities at an offering price set below the true value of the security.
Underwriter
Firm that buys an issue of securities from a company and resells it to the public
Spread
Difference between public offer price and price paid by underwriter.
Firm commitment
Underwriters buy the securities from the firm and then resell them to the public. Underwriter pays for any shares they cannot resell to the public.
Best efforts basis commitment
Underwriter agrees to sell as much of the issue as possible but does not guarantee the sale of the entire issue.
Floatation Costs
The costs incurred when a firm issues new securities to the public
Seasoned Offering
Sale of securities by a firm that is already publicly traded
Rights Issue
Issue of securities offered only to current stockholders
General Cash Offer
Sale of securities open to all investors by an already-public company
Shelf Registration
A procedure that allows firms to file one registration statement for several issues of the same security.
MM's Irrelevance Proposition
- the value of a firm does not depend on its capital structure
- assumes well functioning capital markets and no taxes and ignores costs of financial distress
Financial Leverage
Debt financing to amplify the effects of changes in operating income on the returns to stockholders.
Debt financing advantage
the interest that a firm pays on debt is tax deductible
Interest Tax Shield
Tax savings resulting from deductibility of interest payments
Costs of Financial Distress
Cost arising from bankruptcy or distorted business decisions before bankruptcy.
Trade-off Theory
Debt levels are chosen to balance interest tax shields against the costs of financial distress.
Bankruptcy Costs
if there is a possibility of bankruptcy, the current market value of the firm is reduced by the present value of all court expenses
Loan covenant
agreement between a firm and lender requiring the firm to fulfill certain conditions to safeguard the loan
The Trade-off Theory
debt levels are chosen to balance interest tax shields against the costs of financial distress
A Pecking Order Theory
firms prefer to issue debt rather than equity if internal finance is insufficient
Financial Slack
ready access to cash or debt financing
Cash Dividend
payment of cash by the firm to its shareholders
Stock Dividend/Split
Distributions of additional shares to a firm's stockholders
Open market repurchase
Occurs when the firm purchases stock in the secondary market, just like any other investor.
Tender offer
Firm offers to buy back a stated number of shares at a fixed price
Auction
Firm states a range of prices at which it is prepared to repurchase
Direct negotiation
Firm may negotiate repurchase of a block of shares from a major shareholder
Information Signaling
Dividends and repurchases provide clues about a company's true financial prospects