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COST
Accelerated cost recovery system
• The argument that specifies that the various agency costs create a complex
environment in which total agency costs are at a minimum with some, but less than
100%, debt financing.
Agency costs
All in cost
• Total costs, explicit and other. Example: The all-in cost to a bank of CD money is
the explicit rate of interest it pays on that deposit plus the FDIC premium it must pay
on the deposit plus the hidden cost it incurs because it must hold some portion of
that deposit in a non-interest-bearing reserve account at the Fed.
• The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100%
debt financing.
• Indicates the level of operations necessary to cover all operating costs and the
profitability associated with various levels of sales.
• Abbreviated CCA. The term for the amortization system that must be used for
income tax purposes when reporting to Canada Customs and Revenue Agency. It is
a non-cash expense that increases cash flow.
Carring costs
• Costs that increase with increases in the level of investment in current assets.
Carrying costs
• The variable costs per unit of holding an item in inventory for a specified time
period.
Cost basis
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• See Basis.
• The net present value of an investment divided by the investment's initial cost. Also
called the profitability index.
• Determined by calculating the cost of common stock after considering both the
amount of underpricing and the associated flotation costs.
Cost of capital
• The minimum rate of return that a firm must earn on its project investments to
maintain its market value and attract needed funds. This rate of return is based on
the mix of debt and common equity financing.
• This is the price of capital. When corporations borrow, they pay interest, which is
called the cost of debt capital. In the context of valuing firms, the discount rate is
called the cost of capital.
Cost of carry
• The rate at which investors discount the expected dividends of the firm to
determine its share value: the required rate of return investors demand for holding
the common shares of the company.
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Cost of debt
• Denotes the interest rate paid to bondholders. In the context of valuing firms, if the
capital is debt, the cost of capital is called the cost of debt (synonymous with "yield").
Cost of equity
• This is the price companies pay to raise equity capital. Denotes dividends and
capital gains paid to the shareholders. In the context of valuing firms, if the capital is
equity, then the cost of capital is called cost of equity.
• Is a benchmark used for resetting the coupon rate on an adjustable rate mortgage.
Frequently, this is based on the cost of the 11th District Federal Home Loan
Bankfunds. This district includes Arizona, California and Nevada.
• The implied rate of interest paid to delay payment of an account payable for an
additional number of days.
• The discount rate that equates the after-tax inflows with outflows for capital raised
from limited partners.
• The after tax cost today of raising long-term funds through borrowing.
• Since reinvested profits are common shareholders' money, these funds have a
cost which is the cost of common equity, ks.
Cost yield
• The annual income from an investment divided by the purchase cost. Because it
does not include the effect of premiums and discounts which may have been
included in the purchase cost, it is an incomplete measure of return.
• Systematically investing the same amount of money in the same stock or group of
stocks.
are low, and fewer shares when prices are high. Over time, the average cost per
share of the security will become smaller. This method attempts to lessen the risk of
investing a large amount in a single investment at the wrong time. Used with Mutual
Funds and Dividend Reinvestment Plans.
• The equivalent cost per year of owning an asset over its entire life.
Execution costs
Fixed cost
• A cost that is fixed in total for a given period of time and for given production levels.
Floatation costs
• The total costs of issuing and selling a security. Includes the underwriters discount,
legal, accounting fees and fees paid to regulators.
Flotation costs
Friction costs
• Costs, both implied and direct, associated with a transaction. Such costs include
time, effort, money, and associated tax effects of gathering information and making a
transaction.
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• The total of all costs incurred to get an asset to the point of being able to produce
cash inflows for the company, less the proceeds from the sale of an old asset, often
the asset being replaced.
• Costs and benefits that would occur if a particular course of action were taken
compared to those that would occur if that course of action were not taken.
Installation cost
• The cost of the asset plus its installation costs; equals the asset's depreciable
value.
• Abbreviated MMC. The firm's weighted average cost of capital (WACC) associated
with its next dollar of total new financing.
• Graph that relates the firm's weighted average cost of capital (WACC) to the level
of total new financing.
• Also called price impact costs, the result of a bid/ask spread and a dealer's price
concession.
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• Costs that arise from price movement of the stock during the time of the transaction
which is attributed to other activity in the stock.
• Also called the cost of carry or, simply, carry, the difference between the cost of
financing the purchase of an asset and the asset's cash yield. Positive carry means
that the yield earned is greater than the financing cost; negative carry means that
the financing cost exceeds the yield earned.
• Cash flows that could be realized from the best alternative use of an owned asset.
• The cost of pursuing one course of action measured in terms of the foregone return
offered by the most attractive alternative.
Order costs
Overhead costs
• Costs and expenses that cannot be directly matched to a product or sale, for
example property tax
Product cost
Replacement cost
Search costs
Shortage cost
• Costs that fall with increases in the level of investment in current assets.
Sunk costs
• Cash outlays that have already been made (ie., past outlays) and therefore have
no effect on the cash flows relevant to a current decision.
Trading costs
• Costs of buying and selling marketable securities and borrowing. Trading costs
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include commissions, slippage, and the bid/ask spread. See: transaction costs.
Transaction costs
Transactions costs
• The time, effort, and money necessary, including such things as commission fees
• For a security such as commercial paper that is sold on a discount basis, the
coupon rate required to provide an identical return assuming a coupon-bearing
instrument of like maturity that pays interest in arrears.
Variable cost
• Abbreviated WACC. Reflects the expected average future cost of funds for the
upcoming year; found by weighting the cost of each specific type of capital by its
proportion in the firm's capital structure.
• The average cost of all capital used by a firm. In the context of valuing firms, if the
capital is a mixture of debt and equity. The discount rate is called weighted average
cost of capital.
WACC = (1 - tc) * Rd * D/(D+E) + Re * E/ (D+E)
Where tc is the corporate tax rate , Rd is the contractual interest rate on (new) debt,
Re is the discount rate on equity, D and E are the market values of debt and equity
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respectively. The return of all projects accepted by the corporation must exceed the
weighted average cost of capital (WACC) to create value for the shareholders.
• Expected return on a portfolio of all the firm's securities. Used as a hurdle rate for
capital investment.
• The price of call equals the price of put in a collar. See collars.
• Is a transaction which has little or zero cash outlay or cost for the initiating person.