FAS L6

Efficient market hypothesis The NPV of investing zero is best expressen in terms of returns

leverage the use of debt to buy more assets, total debt/shareholder´s equity

The Law of One Price Thar leverage will not affect the total value of the firm, instead it merely changes the allocation of cash flows between debt and equity without altering the total cash flow of the firm

MM Proposition I In a perfect capital market, the total value of a firm is equal to the market value of the total cash flow generated by its assets and is not affected by its choice of capital structure

MM proposition II the cost of capital of leveraged equity is equal to the cost of capital of unlevered equity plus a premium that is proportional to the market value debt-equity ratio

leveraged recapitalization when a firm uses borrowed funds to may a large special dividends or repurchase a significant amount of outstanding shares

Perfect capital market implies perfect competition, firms and investors can borrow/lend at same rate, equal access to all information, no transaction costs, not taxes

angel investor individual investors who but equity in small private firms, hard to find

venture capital firm a limited partnership that specializes in raising money to invest in the private equity of young firms

venute capitalists one of the general partners who work for and run a venture capital firm, offer limited partners advantages over investing directly in start-ups themselves as angel investors, limited partners more diversified

private equity firms organized very much like a venture capital firm, but it invests in the equity of existing privately held firms rather than start-up companies, initiate their investments by finding a publicly traded firm and purchasing the outstanding equity

institutional investments pension funds, insurance companies, endowments and foundations are active investors in private companies, may invest directly in private firms or they may invest indirectly by becoming limited partners in venture capital firms

corporate investors a corporation that invests in private companies, corporate partner, strategic partner etc

Initial Public Offering IPO the process of selling stock to the public for the first time

crowdfunding funding a project or venture by raising many small amounts of money from a large number of people

corporate debt unsecured debt, notes, debentures, secured debt, mortgage bonds, asset-backed bonds

unsecured debt a type of corporate debt that in the event of bankruptcy, gives bondholders a claim to only the assets of the firm that are not already pledged as collateral on other debt

notes a type of unsecured corporate debt, are typically coupon bonds with maturities shorter than 10 years

debentures a type of secured corporate debt, typically have longer maturities than notes

secured debt type of corporate debt which specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy

mortgage bonds a type of secured corporate debt, real property is pledged as collateral that bondholders have direct claim to in the event of bankruptcy

asset-backed bonds a type of secured corporate debt, specific assets are pledged as collateral that bondholders have a direct claim to in the event of bankruptcy, can be secured by any kind of asset

private debt debt that are not publicly traded, term loans, private placements

debt that are not publicly traded has the advantage that it avoids the cost of registration but has the disadvantages of being illiquid

term loans a bank loan that lasts for a specific term

private placements a bond issue that is sold to a small group of investors rather than the general public

lessee the party in a lease for periodic payments in exchange for the right to use the assets

lessor the party in lease who is entitled to the lease payments in exchange for lending the asset

sales-type lease a type of lease in which the lessor is the manufacturer of the asset

direct lease a type of lease in which the lessor is not the manufacturer, but is often an independent company that specializes in purchasing asset and leasing them to customers

sale and lease-back describes a type of lease in which a firm already owns an asset it would prefer to lease

leveraged leases a lease in which the lessor borrows from a bank or other lender to obtain the initial capital to purchase an asset, using the lease payments to pay interest and principal loan

special-purpose entity SPE a separate business partnership created by a lease for the sole purpose of obtaining a lease

synthetic lease a lease commonly uses a APE and is designed to obtain specific accounting and tax treatments

residual value an assets market value at the end of a lease, the cost of a lease will depend on the assets residual value

PV(Lease Payments) purchase price - PV(Residual value)

loan is fairly priced "Fair value" PV(loan payments)=Purchase price

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