D775 WGU Section 4

Equity Capital

A major type of capital in which companies sell ownership in their firm, and the proceeds from the sale of this ownership is capital that can be used to invest

Debt Capital

capital that is obtained by companies when they borrow money from a lender.

Retained Earnings

cash from previous profitability, as capital.

discretionary financing need (DFN)

Measures the shortfall in funding that must be addressed through external financing options.

When calculating the Discretionary Financing Need (DFN

The firm's total financing need for a project and the funding the company currently has in place

DFN plays a critical role in

working capital management by identifying when a company requires external financing to meet its short-term operational needs.

Working Capital

funds used to manage day-to-day operations, such as purchasing inventory, paying suppliers, and covering payroll.

debt financing

borrowing funds through loans or issuing bonds, which must be repaid with interest

equity financing

selling shares or giving equity holders (more commonly called shareholders) ownership stakes but no guaranteed repayments

cost of capital

The return (in percentage terms) that is required by those who have provided the company capital

Cost of Debt

another name for the interest rate that a company must pay back on the use of any debt financing.

Bonds

debt securities that represent a loan made by investors to the issuer-a company can borrow money directly from the market instead of relying solely on a bank loan.

Bonds offer several advantages

They allow firms to access larger amounts of capital, can diversify the company's funding sources, reducing reliance on traditional lenders, provide regular income through interest payments, allow the firm some flexibility in financing terms

Before-tax cost of debt

The interest rate on loans or bonds. If a bank provides an interest rate on a small business loan of 9.5%, then 9.5% is

After-tax cost of debt

The interest rate on loans or bonds after the tax break associated with using debt financing is applied.

cost of equity

when providing equity capital to firms, the return required by investors

Investors or shareholders

When referring to the required return, who is requiring the return?

Systematic Risk

Another name for market-wide risk. Beta is a measure of something-beta greater than one will be more affected by this market-wide risk event than companies with a beta less than one

total cost of capital

The weighted average of the cost of equity and the after-tax cost of debt. We is the portion of the capital needed for the project that comes from equity financing, while Wd is the portion of the capital needed for the project that comes from debt financing.

Why do riskier companies have a higher cost of capital?

Investors and banks that provide capital to riskier companies will require higher returns and higher interest rates

Capital Budgeting

The process by which businesses evaluate and decide on potential major investments or expenditures.

After-Tax Cost of Debt

The interest rate on loans or bonds after the tax break associated with using debt financing is applied

Discretionary Financing Need (DFN)

The difference between a firm's total financing need for a project and the funding the company currently has in place

Cost of Equity

The return required by investors

Required Return

The return required by investors or those who have provided capital to a company

Capital Budgeting

The process by which businesses evaluate and decide on potential major investments or expenditures