Cost of Capital
This single figure represents the required return on a firm's overall assets, blending the costs of its equity and debt financing.
What is the Weighted Average Cost of Capital (WACC)?
This event occurs when a firm sells equity to the public for the very first time.
What is an Initial Public Offering (IPO)?
This party owns the asset in a lease agreement and allows another party to use it in exchange for periodic payments.
What is the lessor?
This argument shows that an individual investor can replicate any capital structure a firm rejects, simply by borrowing or lending on their own account.
What is homemade leverage?
This strategy involves spreading money across many different investments to reduce risk, often summed up as "don't put all your eggs in one basket."
What is diversification?
This method for estimating the cost of equity relies on next year's expected dividend, the current share price, and an assumed growth rate.
What is the Dividend Growth Model approach?
This term refers to financing for new, high-risk ventures, often sourced from wealthy "angel" investors.
What is venture capital?
This type of lease is typically short-term relative to the asset's useful life and often includes a cancellation option.
What is an operating lease?
"The size of the pie doesn't depend on how it's sliced."
What is MM Proposition I?
This precious metal has traditionally been seen as a "safe haven" asset that investors flock to during times of economic uncertainty.
What is gold?
Unlike the cost of equity, this component of the WACC can often be directly observed in the market via a bond's yield to maturity.
What is the cost of debt?
This well-documented pattern — positive first-day returns on new share issues — means the issuing firm is said to be "leaving money on the table."
What is underpricing?
This "dubious" reason for leasing lost most of its force after AASB 16 came into effect, since the standard now requires most leases to appear on the balance sheet regardless of classification.
What is off-balance-sheet financing?
This theory holds that firms balance the tax benefits of debt against the rising expected costs of financial distress to arrive at an optimal capital structure.
What is the static (trade-off) theory of capital structure?
In financial market slang/terminology, this animal represents a falling market
What is a bear (as in "bear market")?
This term describes the reduction in a firm's cost of debt caused by the tax-deductibility of interest payments, distinguishing the pre-tax and after-tax cost of debt in the WACC formula.
What is the (interest) tax shield?
This hybrid security carries a fixed coupon like a bond but can be exchanged for a set number of ordinary shares.
What is a convertible bond?
Among the three key incremental cash flow differences between leasing and buying, this one is "missed out on" by the lessee because do not own the asset.
What is the depreciation tax shield?
This theory rejects the idea of an optimal capital structure altogether, instead arguing firms follow a strict hierarchy of financing preferences, driven by information asymmetry between managers and investors.
What is the pecking order theory?
This investing legend, known as the "Oracle of Omaha," built his fortune through long-term value investing and leads Berkshire Hathaway.
Who is Warren Buffett?