|Cost of Equity|
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Definition of Cost of Equity
Cost of Equity
Same as the cost of common stock. Sometimes viewed as the
The tendency to do less work when the return is smaller. Owners may have more incentive to shirk
The costs incurred by an organization to fund all its investments, comprising the risk-adjusted
Schedule of depreciation rates allowed for tax purposes.
The argument that specifies that the various agency costs create a complex environment in
The incremental costs of having an agent make decisions for a principal.
The discount rate that reflects only the business risks of a project and abstracts from the
Total costs, explicit and implicit.
The ratio of total assets to stockholder equity.
A firm's required payout to the bondholders and to the stockholders expressed as a
The argument that expected indirect and direct bankruptcy costs offset the other
A management style that de-emphasizes the significance of economic
costs that increase with increases in the level of investment in current assets.
Value of outstanding common shares at par, plus accumulated retained
Arrangement whereby the shareholders of a project receive output free of
The required return for a capital budgeting project.
Cost of carry
Related: Net financing cost
Cost of funds
Interest rate associated with borrowing money.
Cost of lease financing
A lease's internal rate of return.
Cost of limited partner capital
The discount rate that equates the after-tax inflows with outflows for capital
The net present value of an investment divided by the investment's initial cost. Also called
Indicator of financial leverage. Compares assets provided by creditors to assets provided
A common term for convertible bonds because of their equity component and the
Dual syndicate equity offering
An international equity placement where the offering is split into two
Represents ownership interest in a firm. Also the residual dollar value of a futures trading account,
An agreement in which one party, for an upfront premium, agrees to compensate the other at
Also called a residual claim, a claim to a share of earnings after debt obligation have been
The simultaneous purchase of an equity floor and sale of an equity cap.
Equity contribution agreement
An agreement to contribute equity to a project under certain specified
An agreement in which one party agrees to pay the other at specific time periods if a specific
Used to refer to warrants because they are usually issued attached to privately placed bonds.
Total assets divided by total common stockholders' equity; the amount of total assets per
Securities that give the holder the right to buy or sell a specified number of shares of stock, at
A swap in which the cash flows that are exchanged are based on the total return on some stock
Related: Variable life
Those holding shares of the firm's equity.
Equivalent annual cost
The equivalent cost per year of owning an asset over its entire life.
Securities sold in the Euromarket. That is, securities initially sold to investors
The difference between the execution price of a security and the price that would have
Financial distress costs
Legal and administrative costs of liquidation or reorganization. Also includes
A cost that is fixed in total for a given period of time and for given production levels.
Foreign equity market
That portion of the domestic equity market that represents issues floated by foreign companies.
costs, both implied and direct, associated with a transaction. Such costs include time, effort,
GEMs (growing-equity mortgages)
Mortgages in which annual increases in monthly payments are used to
Incremental costs and benefits
costs and benefits that would occur if a particular course of action were
Transaction costs that include the assessment of the investment merits of a financial asset.
The balance of a margin account. Related: buying on margin, initial margin requirement.
Stock in a firm that relies on financial leverage. Holders of leveraged equity face the
Long-term debt to equity ratio
A capitalization ratio comparing long-term debt to shareholders' equity.
Market impact costs
Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.
Market timing costs
costs that arise from price movement of the stock during the time of the transaction
Net financing cost
Also called the cost of carry or, simply, carry, the difference between the cost of financing
Opportunity cost of capital
Expected return that is foregone by investing in a project rather than in
The difference in the performance of an actual investment and a desired investment
Preferred equity redemption stock (PERC)
Preferred stock that converts automatically into equity at a
Price impact costs
Related: market impact costs
cost to replace a firm's assets.
Return on equity (ROE)
Indicator of profitability. Determined by dividing net income for the past 12
Round-trip transactions costs
costs of completing a transaction, including commissions, market impact
costs associated with locating a counterparty to a trade, including explicit costs (such as
This is a company's total assets minus total liabilities. A company's net worth is the
costs that fall with increases in the level of investment in current assets.
Balance sheet item that includes the book value of ownership in the corporation. It
The residual claims that stockholders have against a firm's assets, calculated by
Stratified equity indexing
A method of constructing a replicating portfolio in which the stocks in the index
costs that have been incurred and cannot be reversed.
Top-down equity management style
A management style that begins with an assessment of the overall
Total debt to equity ratio
A capitalization ratio comparing current liabilities plus long-term debt to
costs of buying and selling marketable securities and borrowing. Trading costs include
The time, effort, and money necessary, including such things as commission fees and the
True interest cost
For a security such as commercial paper that is sold on a discount basis, the coupon rate
A cost that is directly proportional to the volume of output produced. When production is zero,
Weighted average cost of capital
Expected return on a portfolio of all the firm's securities. Used as a hurdle
An asset’s purchase price, plus costs associated with the purchase, like installation fees, taxes, etc.
Cost of goods sold
The cost of merchandise that a company sold this year. For manufacturing companies, the cost of raw
MACRS (Modified Accelerated Cost Recovery System)
A depreciation method created by the IRS under the Tax Reform Act of 1986. Companies must use it to depreciate all plant and equipment assets installed after December 31, 1986 (for tax purposes).
RATE OF RETURN ON STOCKHOLDERS’ EQUITY
The percentage return or profit that management made on each dollar stockholders invested in a company. Here’s how you figure it:
RATIO OF DEBT TO STOCKHOLDERS’ EQUITY
A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
STOCKHOLDERS’ (OR OWNERS’) EQUITY
The value of the owners’ interests in a company.
A method of costing in which all fixed and variable production costs are charged to products or services using an allocation base.
A method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers.
costs that are identifiable with and able to be influenced by decisions made at the business
The amount of cash expended.
A resource sacrificed or forgone to achieve a specific objective (Horngren et al.), defined
The idea that fixed costs and variable costs react differently to changes in the volume of
A division or unit of an organization that is responsible for controlling costs.
The process of either reducing costs while maintaining the same level of productivity or maintaining costs while increasing productivity.
The most significant cause of the cost of an activity, a measure of the demand for an activity
Anything for which a measurement of cost is required – inputs, processes, outputs or responsibility centres.
Cost of goods sold
See cost of sales.
Cost of manufacture
The cost of goods manufactured for subsequent sale.
Cost of quality
The difference between the actual costs of production, selling and service and the costs that would be incurred if there were no failures during production or usage of products or services.
Cost of sales
The manufacture or purchase price of goods sold in a period or the cost of providing a service.
A method of pricing in which a mark-up is added to the total product/service cost.
The costs of (cross-functional) business processes, irrespective of the organizational structure of the business.
Cost–volume–profit analysis (CVP)
A method for understanding the relationship between revenue, cost and sales volume.
costs that are readily traceable to particular products or services.
Funds raised from shareholders.
costs that do not change with increases or decreases in the volume of goods or services
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