Financial capital – I

Debt covenants often restrict a company from issuing large dividends to ensure that sufficient cash is available to meet debt obligations. This protects the lender’s interests by preserving cash flow.

Angel investors are individuals who invest in startups or early-stage companies, often providing seed money in exchange for equity ownership.

Preferred stockholders have priority over common stockholders when it comes to dividend payments, but they generally do not have voting rights like common stockholders.

Convertible debt gives the lender the option to convert the debt into equity, typically at a predetermined price, allowing them to benefit if the company’s stock appreciates.

Mezzanine financing combines features of debt and equity financing, often involving subordinated debt with warrants or options to convert into equity, giving it higher risk but potentially higher returns.

Venture capitalists invest in startups and early-stage companies in exchange for equity, aiming for high returns if the business succeeds.

High leverage means that a company uses a significant amount of debt relative to its equity, which increases financial risk but may also amplify returns for shareholders.

The cost of capital includes both the cost of debt and the cost of equity. The WACC is the weighted average of the cost of each type of capital, reflecting the overall expense of financing.

Capital structure refers to how a company finances its operations and growth using a combination of equity (shareholders’ investment) and debt (borrowed money).

A key advantage of debt financing is that interest payments on debt are tax-deductible, which can lower a company’s overall tax burden. Unlike equity, debt does not dilute ownership.