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Is a money market fund risky?
No, the money market funds are not risky as compared to the equity funds. They are just debt funds. In the money market the volatility is much less than in the equity market, that is why it is not risky.
What is assets to debt ratio?
=Total LiabilitiesShareholders EquityIndicates what proportion of equity and debt that the company is using to finance its assets. Sometimes investors only use long term debt instead of total liabilities for a more stringent test.Things to remember * A ratio greater than one means assets are mainly financed with debt, less than one means equity provides a majority of the financing.* If the ratio is high (financed more with debt) then the company is in a risky position - especially if interest rates are on the rise.
Is debt to equity ration generally equal or less than the debt to asset ratio?
less
Is underwriting spread for debt is generally less than that for equity?
yes
Why is debt a cheaper form of finance than equity?
This can be easily explain using financial theory. Debt financing is cheaper than equity will hold true only when; 1) your company wiil be taxed on any profits 2) your company will make profits 3) Interest paid on debt financing is tax deductable 4) your company will reach at least the same sales figure with or without debt This is because the benefit of "Tax Sheild" which arised from the fact that government allows interest paid on debt financing to be tax deductable. For example, if your company makes 1 million in profit, if you have debt, you can use interest paid on debt to lower your taxable profit. Therefore, the government will calculate your tax from 1million less interest paid on debt not the full 1million. Saving from paying lower tax will eventually be resulted back into shareholders' pocket. To understand that debt is cheaper financing than equity, you must not look at the ending profit because your net profit will be lower than not having debt BUT the cash flows to shareholders and debt holder will be higher as a result from the transfer of tax saving.
Why does the weighted average cost of capital of firms that uses more debt capital lower that that of a firm that uses less debt capital?
Because the cost of debt is generally lower than the cost of equity. This is because in case of financial distress, debt-holders are repaid before the equity holders are, as well as because debt has the assets of the firm as collateral and equity does not.
What is ideal debt to equity ratio?
Debt-to-Equity ratio compares the Total Liabilities to the Total Equity of the company. It paints a useful picture of the company's liability position and is frequently used. Debt-to-Equity Ratio = Total Liabilities / Shareholder's EquityBoth the Total Liabilities and Shareholder's Equity are found on the Balance Sheet.When this number is less than 1, it indicates that the company's creditors have less money in the company than its equity holders. That, typically, would be an ideal threshold to be below.It's common for large, well-established companies to have Debt-to-Equity ratios exceeding 1. For instance, GE carries a Debt-to-Equity ratio of around 4.4 (440%), and IBM around (1.3)130%.
Is cost of equity capital less than cost of debt capital?
Cost of equity > Cost of debt Reason: When u issue debt, for example in the form of bonds, u have to pay bondholders interest. This interest is tax deductible. On the other hand, when u issue equity, i.e. stocks, u pay dividends. This dividend is taxed as corporate income. Because of the ability of debt to escape taxation vis-a-vis equity, cost of debt is lower than cost of equity. In fact, this is called a debt tax shield.
Do banks take less money on home equity loans to clear the debt faster?
Hello
Why don't financial managers use as little debt as possible to keep the cost of equity down?
The answer to the question depends on the motivations of management. Increasing debt increases risk should the economy weaken and repayment becomes a problem. Managers who are owners often prefer to minimize debt regardless of its cost so as to preserve a margin of safety in case hard times comes. If the manager is not an owner, debt is attractive because it provides leverage. Suppose a company without debt earns $100,000 on equity of $1 million. Its return on equity is 10%. Now suppose the manager could borrow another $1 million. If he paid 5% interest, he would net $50,000 additional earnings. Note that the resulting $150,000 of earnings would be a 15% return on the $1 million of equity. Investors would bid up the price of the stock based on the higher return on equity. The Cost of Debt: when a company borrows funds from a financial institution, the interest amount paid on that debt is called cost of debt. Cost of Equity: When a company raises money from shareholders by issuing more shares to them or shares to new shareholders, then the dividend (interest) paid to them is called cost of equity. The use of debt lowers the cost of capital not the cost of equity. Debt holders are paid back before equity holders, therefore there is a decreased risk for debt. Because of the ability of debt to escape taxation vs equity, cost of debt is lower than cost of equity. With all that said; Debt costs less than equity financing, because it is tax deductable vs dividends, that are not tax deductable. Debt to a bank though is more risky from a company's perspective because of liquidation risk vs stock value risk. Maximizing shareholder value is the goal of a company, but risking losing the company and one's job, to the bank and liquidation vs a decrease in stock value, is usually preferable. But, one of the main reasons that financial managers don't use as little debt as possible is because using it allows companies to do projects that they otherwise might be able to afford.
How does one obtain a debt consolidation loan using the equity in your home?
Debt considation - equity in homeYou may restructure your debt using your equity in your home 2 ways. 1. you may obtain a home equity line of credit - less fees usually a adjustable rate 2. refinance your 1st mortgage and cash out to pay off debt - fixed rate, higher fees. You need a mortgage consultation to determine which option is better for you.
Difference between debt market and equity market?
'''First, some definitions''' The debt market is the market where debt instruments are traded. Debt instruments are assets that require a fixed payment to the holder, usually with interest. Examples of debt instruments include bonds (government or corporate) and mortgages. The equity market (often referred to as the stock market) is the market for trading equity instruments. Stocks are securities that are a claim on the earnings and assets of a corporation (Mishkin 1998). An example of an equity instrument would be common stock shares, such as those traded on the New York Stock Exchange. '''How are debt instruments different from equity instruments?''' There are important differences between stocks and bonds. Let me highlight several of them: # Equity financing allows a company to acquire funds (often for investment) without incurring debt. On the other hand, issuing a bond does increase the debt burden of the bond issuer because contractual interest payments must be paid- unlike dividends, they cannot be reduced or suspended. # Those who purchase equity instruments (stocks) gain ownership of the business whose shares they hold (in other words, they gain the right to vote on the issues important to the firm). In addition, equity holders have claims on the future earnings of the firm. In contrast, bondholders do not gain ownership in the business or have any claims to the future profits of the borrower. The borrower's only obligation is to repay the loan with interest. # Bonds are considered to be less risky investments for at least two reasons. First, bond market returns are less volatile than stock market returns. Second, should the company run into trouble, bondholders are paid first, before other expenses are paid. Shareholders are less likely to receive any compensation in this scenario.
