Risk and Return
The potential return on a risky asset.
What is expected return?
Terms describing the % used for evaluating investment projects
What are discount rate, required return and cost of capital?
Taxes or Bankruptcy costs in M&M II
What are assumed not to exist?
Payment made out of firm's earnings to its owners.
What is a dividend?
The first time that a company sells stock to the public
What is an Initial Public Offering (IPO)?
The percentage of a group of investments that is attributable to a single asset.
What is portfolio weight?
Two methods for determining the cost of equity for a firm.
What are the Dividend Growth Model Approach and the SML approach?
This is the level of EBIT that results in the same EPS for two different capital structures.
What is the breakeven point?
The two most common ways of returning cash to shareholders
What are cash dividends and share repurchases?
Private equity financing for small, high risk companies
What is venture capital?
Measure of risk as compared to the risk of the overall market.
What is beta?
D/V and E/V
What are the capital structure weights for debt and equity?
This can results in higher volatility of earnings and expected equity returns.
What is increasing leverage?
The date that the board of directors approves the future payment of a dividend.
What is the date that the dividend becomes a legal liability of the company ? or What is the declaration date?
Types of debt financing.
What are bank loans and the issuance of bonds?
E(RA) = Rf + betaA(RM - Rf)
What is the Security Market Line or Capital Asset Pricing Model?
RE(E/V) + RP(P/V) + RD(D/V)(1-TC)
What is the weighted Average Cost of Capital?
1. Administrative Costs associated with bankruptcy
2. Expenses arising from the filing of bankruptcy petition before appointment of a trustee
3. Wages and salaries
4. Contributions to employee benefit plans
5. Customer claims
6. Government tax claims
7. Payment to creditors
8. Payment to stockholders
What is the priority of payments in a liquidation?
Berkshire Hathaway's stock price is $327,000 because it does not believe that this increases shareholder value.
What are stock splits?
Underwriters' spread, indirect expenses, under pricing and green shoe option
What are some costs of issuing securities?
The investment principle of spreading investment across a number of assets with different unsystematic risks.
What is diversification?
An appropriate discount rate for a project that is riskier that the average risk of the firm.
What is a cost of capital that is higher than the firm's WACC?
The relative amounts of debt and equity that minimizes a firm's WACC.
What is the optimal capital structure?
A type of dividend that theoretically does not change the value of a firm.
What is a stock dividend?
1,000 shares of Apple's IPO at a split adjusted price of $0.51/share that is worth $266,400 today.
What do we all wish we had bought?