wcm assignments - 01

7/25/2019 WCM Assignments - 01

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bond issue. !ther critical information included in the indenture are the financial covenants that

govern the issuer and the formulas for calculating whether the issuer is within the covenants.

7. Book Value:Boo" value refers to the total amount a company would be worth if it li&uidated

its assets and paid bac" all its liabilities. Boo" value can also represent the value of a particularasset on the company's balance sheet after ta"ing accumulated depreciation into account.


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. Ca!ital "tructure:A capital structure is a mix of a company's long(term debt, specific short(

term debt, common e&uity and preferred e&uity. The capital structure is how a firm finances its

overall operations and growth by using different sources of funds. )ebt comes in the form of

bond issues or long(term notes payable, while e&uity is classified as common stoc", preferred

stoc" or retained earnings. Short(term debt such as wor"ing capital re&uirements is also

considered to be part of the capital structure.

#. Co$$on "tock:A common stoc" is a security that represents ownership in a corporation.

*olders of common stoc" exercise control by electing a board of directors and voting on

corporate policy. +ommon stoc"holders are on the bottom of the priority ladder for ownership

structure. n the event of li&uidation, common shareholders have rights to a company's assets

only after bondholders, preferred shareholders and other debtholders have been paid in full.

1%. Cost o& Ca!ital:The cost of funds used for financing a business. +ost of capital depends on

the mode of financing used - it refers to the cost of e&uity if the business is financed solely

through e&uity, or to the cost of debt if it is financed solely through debt. any companies use a

combination of debt and e&uity to finance their businesses, and for such companies, their overall

cost of capital is derived from a weighted average of all capital sources, widely "nown as the

weighted average cost of capital #A++$. Since the cost of capital represents a hurdle rate that a

company must overcome before it can generate value, it is extensively used in the capital

budgeting process to determine whether the company should proceed with a pro%ect.

11. 'e(enture:A debenture is a type of debt instrument that is not secured by physical assets or

collateral. )ebentures are bac"ed only by the general creditworthiness and reputation of the

issuer. Both corporations and governments fre&uently issue this type of bond to secure capital.

0i"e other types of bonds, debentures are documented in an indenture.

12. )iversifiable ris"3 +ompany( or industry(specific haard that is inherent in each investment.

Unsystematic ris", also "nown as 4nonsystematic ris",5 6specific ris",6 6diversifiable ris"6 or6residual ris",6 can be reduced through diversification. By owning stoc"s in different companies

and in different industries, as well as by owning other types of securities such as Treasuries and

municipal securities, investors will be less affected by an event or decision that has a strong

impact on one company, industry or investment type. 7xamples of unsystematic ris" include a

new competitor, a regulatory change, a management change and a product recall.


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13. 'i)idend !ayout ratio:The part of the earnings not paid to investors is left for investment to

provide for future earnings growth. nvestors see"ing high current income and limited capital

growth prefer companies with high )ividend payout ratio. *owever investors see"ing capital

growth may prefer lower payout ratio because capital gains are taxed at a lower rate. *igh

growth firms in early life generally have low or ero payout ratios. As they mature, they tend to

return more of the earnings bac" to investors. 8ote that dividend payout ratio is calculated as

)9S/79S.

14. *inancial le)erage::inancial leverage is the degree to which a company uses fixed(income

securities such as debt and preferred e&uity. The more debt financing a company uses, the higher

its financial leverage. A high degree of financial leverage means high interest payments, which

negatively affect the company's bottom(line earnings per share.

15. Pri)ate !lace$ent:A private placement is the sale of securities to a relatively small number

of select investors as a way of raising capital. nvestors involved in private placements are

usually large ban"s, mutual funds, insurance companies and pension funds. A private placement

is different from a public issue, in which securities are made available for sale on the open

mar"et to any type of investor.

16. +oney $arket securities: oney mar"et securities are essentially !Us issued by

governments, financial institutions and large corporations. These instruments are very li&uid andconsidered extraordinarily safe. Because they are extremely conservative, money mar"et

securities offer significantly lower returns than most other securities.

17. 'e&ault risk:)efault ris" is the chance that companies or individuals will be unable to the

re&uired payments on their debt obligations. 0enders and investors are exposed to default ris" in

virtually all forms of credit extensions. To mitigate the impact of default ris", lenders often

charge rates of return that correspond the debtor's level of default ris". A higher level of ris"

leads to a higher re&uired return.

1;. +ase forecasting3

wcm assignments - 01

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