Valuation Glossary

Debt-free means not owing any money or having any outstanding loans or debts to repay. It refers to a situation where a person or organization has successfully paid off all their debts and doesn't owe any money to lenders or creditors. Being debt-free provides financial freedom and relief from the burden of ongoing debt payments. It allows individuals and organizations to focus on saving, investing, and achieving their financial goals without the constraint of debt. Being debt-free is considered a positive financial state as it brings peace of mind and greater control over one's financial situation.

A debt-for-equity swap is a financial restructuring strategy where a company's creditors agree to exchange a portion or all of their debt for equity in the company.

A debt-for-debt swap is a financial transaction where a company exchanges its existing debt obligations for new debt with different terms.

Debt covenants are conditions or restrictions set by lenders in a loan agreement to protect their interests. These covenants are designed to ensure that the borrower maintains certain financial and operational standards.
If the borrower violates these covenants, it may result in penalties, higher interest rates, or even the loan being called due immediately.

The cost of capital is the expense a company incurs to obtain funds for its operations and investments. It represents the minimum return a company needs to generate to satisfy its investors and lenders. It consists of the cost of debt (interest expense and fees associated with borrowing money) and the cost of equity (the return expected by shareholders). The weighted average cost of capital (WACC) is a common measure that considers the proportion of debt and equity in the company's capital structure. The cost of capital helps companies assess investment opportunities and make financial decisions. It is used to compare potential returns with the cost of financing and plays a role in determining the appropriate discount rate for future cash flows.