IFA Business Finance & Investment Flashcards

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

Answer: The blended cost of all capital sources weighted by their proportion in the capital structure

WACC is calculated by weighting the cost of each capital component (equity, debt) by its proportional share of total capital, representing the firm's overall financing cost.

Which of the following is an example of equity financing?

Answer: Issuing new common stock

Issuing new common stock raises equity capital from shareholders without creating a repayment obligation, unlike debt instruments.

What is a dividend policy and how does it affect shareholders?

Answer: The decision on how much of profits to distribute to shareholders versus retain in the business

A dividend policy determines what portion of earnings is paid to shareholders as dividends and what is retained for reinvestment, directly affecting shareholder income and growth prospects.

What is the primary purpose of a prospectus when a company issues new securities?

Answer: To provide potential investors with material information about the offering and the company

A prospectus is a formal legal document providing detailed information about the company, the securities being offered, and associated risks to enable informed investment decisions.

What does 'leverage' mean in a business finance context?

Answer: The use of borrowed funds to amplify potential returns and risks

Financial leverage involves using debt to finance assets, amplifying both potential returns on equity and the risk of losses if returns fall below the cost of debt.

Which financial market instrument provides its holder with a fixed interest payment and return of principal at maturity?

Answer: Corporate bond

A corporate bond pays a fixed coupon (interest) at regular intervals and returns the face value (principal) to the holder at the maturity date.