|Opportunity cost of capital|
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Definition of Opportunity cost of capital
Opportunity cost of capital
Expected return that is foregone by investing in a project rather than in
opportunity cost of capital
the highest rate of return that
opportunity cost of capital
Expected rate of return given up by investing in a project.
Common stock of a company that has an opportunity to invest money and earn more than the
costs of maintaining current assets, including opportunity cost of capital.
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.
Total costs, explicit and implicit.
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
Money invested in a firm.
Net result of public and private international investment and lending activities.
decision Allocation of invested funds between risk-free assets versus the risky portfolio.
An economic theory that describes the relationship between risk and
A firm's set of planned capital expenditures.
The process of choosing the firm's long-term capital assets.
Amount used during a particular period to acquire or improve long-term assets such as
The transfer of capital abroad in response to fears of political risk.
When a stock is sold for a profit, it's the difference between the net sales price of securities and
Capital gains yield
The price change portion of a stock's return.
A lease obligation that has to be capitalized on the balance sheet.
The difference between the net cost of a security and the net sale price, if that security is sold at a loss.
The market for trading long-term debt instruments (those that mature in more than one year).
Capital market efficiency
Reflects the relative amount of wealth wasted in making transactions. An efficient
Capital market imperfections view
The view that issuing debt is generally valuable but that the firm's
Capital market line (CML)
The line defined by every combination of the risk-free asset and the market portfolio.
Placing one or more limits on the amount of new investment undertaken by a firm, either
The makeup of the liabilities and stockholders' equity side of the balance sheet, especially
Amounts of directly contributed equity capital in excess of the par value.
The debt and/or equity mix that fund a firm's assets.
A method of constructing a replicating portfolio in which the manager purchases a
Also called financial leverage ratios, these ratios compare debt to total capitalization
A table showing the capitalization of a firm, which typically includes the amount of
Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures
Interest that is not immediately expensed, but rather is considered as an asset and is then
costs that increase with increases in the level of investment in current assets.
Complete capital market
A market in which there is a distinct marketable security for each and every
Cost company arrangement
Arrangement whereby the shareholders of a project receive output free of
Cost of capital
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
Total par value (number of shares issued, multiplied by the par value of each share). Also
Efficient capital market
A market in which new information is very quickly reflected accurately in share
Equivalent annual cost
The equivalent cost per year of owning an asset over its entire life.
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.
costs, both implied and direct, associated with a transaction. Such costs include time, effort,
opportunity to invest in profitable projects.
Hard capital rationing
capital rationing that under no circumstances can be violated.
The unique capabilities and expertise of individuals.
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.
Issued share capital
Total amount of shares that are in issue. Related: outstanding shares.
Value at which a company's shares are recorded in its books.
Indicator of financial leverage. Shows long-term debt as a proportion of the
The total dollar value of all outstanding shares. Computed as shares times current
Market capitalization rate
Expected return on a security. The market-consensus estimate of the appropriate
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
Net working capital
Current assets minus current liabilities. Often simply referred to as working capital.
Nondiversifiability of human capital
The difficulty of diversifying one's human capital (the unique
The difference in the performance of an actual investment and a desired investment
The possible expected return and standard deviation pairs of all portfolios that can be
In the balance of payments, other capital is a residual category that groups all the capital
Outstanding share capital
Issued share capital less the par value of shares that are held in the company's treasury.
Pecking-order view (of capital structure)
The argument that external financing transaction costs, especially
Perfect capital market
A market in which there are never any arbitrage opportunities.
Perfect market view (of capital structure)
Analysis of a firm's capital structure decision, which shows the
Personal tax view (of capital structure)
The argument that the difference in personal tax rates between
Pie model of capital structure
A model of the debt/equity ratio of the firms, graphically depicted in slices of
Planned capital expenditure program
capital expenditure program as outlined in the corporate financial plan.
Portfolio opportunity set
The expected return/standard deviation pairs of all portfolios that can be
Price impact costs
Related: market impact costs
Pro forma capital structure analysis
A method of analyzing the impact of alternative capital structure
Wealth that can be represented in financial terms, such as savings account balances, financial
cost to replace a firm's assets.
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
costs that fall with increases in the level of investment in current assets.
"Soft" Capital Rationing
capital rationing that under certain circumstances can be violated or even viewed
Static theory of capital structure
Theory that the firm's capital structure is determined by a trade-off of the
costs that have been incurred and cannot be reversed.
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,
An investment in a start-up business that is perceived to have excellent growth prospects but
Weighted average cost of capital
Expected return on a portfolio of all the firm's securities. Used as a hurdle
Defined as the difference in current assets and current liabilities (excluding short-term
Working capital management
The management of current assets and current liabilities to maximize shortterm liquidity.
Working capital ratio
Working capital expressed as a percentage of sales.
The money, raised by selling stock or bonds or taking out loans, that you use to start, operate, and grow a business.
CAPITAL IN EXCESS OF PAR VALUE
What a company collected when it sold stock for more than the par value per share.
An asset’s purchase price, plus costs associated with the purchase, like installation fees, taxes, etc.
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