HMGT 655 Final Exam Questions And Answers With Verified Study Solutions

Capital - Money, or the equivalent of money, that is loaned to, or invested in, a business Debt - Fixed Obligation or liability of the business that must be paid back, with interest, over a specified period of time Equity - Ownership in the business that does not require immediate repayment, but requires a return on the capital invested Cost of Debt - Interest expense the borrower pays the lender Cost of Equity - Portion of cash flow the sponsor of a deal allocates to the investor WACC definition - Amount of interest expense and cash flow allotted to equity investors divided by the amount of capital WACC Formula - (weight of debt)(cost of debt)(1-tax rate) + (Weight of equity)(cost of equity) Financial Leverage - Increasing debt to lower the cost of capital Advantages of debt - -Tax effect -More sources -Easier to obtain -Does not dilute ownership -Cheaper than equity Advantages of Equity - -less demanding than creditors -Doesn't require a set payment timeline-Owners cannot close a business -Partners can add experience Principal - amount of money borrowed Term - Number of months or years given to repay the loan Interest - Amount paid to the lender for lending the funds Principal repayment - Portion of debt service that reduces the amount of money owed to the lender Amortization rate - Number of years debt service calculation is based upon Collateral - Asset offered to lender as loan insurance