Understanding Long Term Finance

What is the cost of capital?

• The cost of capital refers to the profit margin of a business.

• The cost of capital is the required return necessary to make a capital budgeting project worthwhile.

• The cost of capital is the total expenses incurred in a project.

• The cost of capital is the amount of money a company has in its bank account.

Define cost of debt.

• The cost of debt is the total revenue generated by a company.

• The cost of debt refers to the equity financing a company uses.

• The cost of debt is the effective interest rate a company pays on its borrowed funds.

• The cost of debt is the amount a company pays in dividends to shareholders.

What factors influence the cost of equity?

• Brand recognition

• Employee satisfaction

• Company's market share

• Risk-free rate, equity risk premium, company's beta, growth prospects, market conditions, financial health, dividend policy, investor sentiment.

Explain the concept of retained earnings.

• Retained earnings are the funds distributed to shareholders as dividends.

• Retained earnings are the portion of a company's profit that is held back for reinvestment, rather than being paid out as dividends.

• Retained earnings are the total revenue generated by a company in a year.

• Retained earnings are the initial investment made by the owners of the company.

What is the weighted average cost of capital (WACC)?

• The weighted average cost of capital (WACC) is the average rate of return a company is expected to pay its security holders to finance its assets.

• The weighted average cost of capital is the total market value of a company's assets.

• The WACC is the total profit a company makes from its investments.

• WACC is the interest rate on a company's loans only.

How does leverage affect a company's capital structure?

• Leverage decreases a company's debt, reducing risk and return.

• Leverage has no impact on a company's capital structure.

• Leverage only affects equity financing, not debt.

• Leverage increases debt in a company's capital structure, affecting risk and return.

What are the different types of leverage?

• Market leverage

• Equity leverage

• Debt leverage

• Financial leverage, operational leverage, combined leverage

Describe the Modigliani-Miller theorem.

• The Modigliani-Miller theorem asserts that higher leverage always leads to lower overall risk for a firm.

• The Modigliani-Miller theorem states that debt financing always increases a firm's value.

• The Modigliani-Miller theorem asserts that a firm's value is independent of its capital structure in a perfect market.

• The theorem claims that a firm's value is determined solely by its assets, not its capital structure.

What is the pecking order theory in capital structure?

• The pecking order theory suggests that all financing should come from external sources.

• The pecking order theory prioritizes debt financing over internal financing.

• The pecking order theory in capital structure prioritizes internal financing, followed by debt, and lastly equity.

• The pecking order theory states that equity is preferred over debt.

How do angel investors differ from venture capitalists?

• Venture capitalists invest personal savings, while angel investors use company profits.

• Angel investors only fund tech startups, while venture capitalists fund all industries.

• Angel investors focus on large corporations, while venture capitalists support small businesses.

• Angel investors invest personal funds in early-stage startups, while venture capitalists manage pooled funds and invest in more established companies.