HRTM 421 ch. 6 Quiz (100% correct)

Capital correct answers Money or equivalent of money that is loan or invested in a business Types of capital correct answers Debt; equity Debt correct answers Fixed obligation or liability of the business that must be paid back with interest over specified time Equity correct answers Ownership in the business that does not require immediate repayment but requires a return on capital invested Cost of debt correct answers Interest borrower pays lender Cost of equity correct answers Portion of cash flow the sponsor of a deal allocated to the investor Weighted average cost of capital correct answers WACC WACC correct answers WACC=w_d_k_d_(1-T)+w_e_k_e_ w_d_ correct answers weighted debt k_d_ (1-T) correct answers cost of debt T correct answers tax rate of business (1-T) correct answers tax effect weighted cost of debt correct answers w_d_k_d_(1-T) w_e_ correct answers weighted equity w_e_k_e_ correct answers weighted cost of equity FInancial leverage correct answers increasing debt to lower cost of capital Advantage of debt correct answers cost of debt is lower than the cost of equity; tax effect; easier to obtain; more sources; does not dilute ownership Advantages of Equity correct answers less demanding than creditors; does not require a set payment deadline; owners cannot close down a business; partners can add experience knowledge and expertise Principal correct answers amount of money borrowed term correct answers time given to repay loan