10 - Capital Structure

  1. Financial Leverage
    Use of securities to finance a portion of the firm's assets that pay investors a fixed (limited)rate of return.

    Can arise from the use of either debt or preference-share financing.
  2. Operating Leverage
    Responsiveness of the firm's EBIT to changes in revenue.

    Arises from the proportion of the firm's operating costs that are fixed.
  3. Semi-variable (Semi-fixed) Costs
    Charges that behave as variable costs over certain ranges of output and as fixed costs over other ranges of output.
  4. Indifference Point
    Level of EBIT that will equate earnings per share (EPS) between two financing plans with different degrees of financial leverage.
  5. Financial Structure
    The mix of all the short and long-term sources of finance that appear on the firm's balance sheet.
  6. Capital Structure
    The mix of long-term sources of debt and equity finance used by the firm.
  7. Financial Structure Design
    The mix of short and long-term permanent financing components to minimise the cost of raising a given amount of funds.
  8. Optimal Capital Structure
    Structure which, when raising a given amount of funds, minimises the company's weighted average cost of capital and maximises the company's share price and shareholder wealth.
  9. Explicit Cost of Debt
    The actual cost incurred by using debt funds.
  10. Implicit Cost of Debt
    Change in the cost of ordinary equity brought on by using financial leverage.
  11. Tax Shield
    The reduction in income tax due to the tax deduction allowed to business for interest paid on debt capital.
  12. Debt Capacity
    The maximum proportion of debt that the firm can include in its capital structure and still maintain its lowest weighted average cost of capital.
  13. Optimal Range of Financial Leverage
    Range of various capital-structure combinations that yield the lowest overall weighted average cost of capital for the firm.
Card Set
10 - Capital Structure
211 - Capital Structure