Corporate finance chapter 1

chapter 1

Real assets

assets used to produce goods and services

Real assets examples:

plant, property, machinery, land

Financial assets:

financial claims to the income generated by the firm’s real assets

Financial assets example:

Debt & equity

CAPEX( capital expenditure)

money used by a company to purchase, maintain or expand fixed assets

CAPEX formula

change in property, land, equipment+ current depreciation

leverage

debt/equity

if leverage>1

high leverage

if leverage<1

low leverage

capital structure decision:

choice between debt&equity financing;

capital

a firm’s long-term source of financing

corporation

a business organised as a separate legal entity owned by shareholders; can be public/private

limited liability

characteristic of a corporation; the owners of a corporation are not responsible for its obligations

hurdle rate

minimum acceptable return on investment

cost of capital

cost of the investment funding: depend on capital structure