Man Ec: #16 Flashcards
Equitety
represents a stake in a corporation made by an investor
What two things does someone get when they buy stock from a firm?
They get some degree of ownership and a claim on the earnings of that firm
Is the NYSE a primary or a secondary market for securities?
It is a secondary market. New stock issuance starts in a primary market, and then can be traded in the secondary such as the NYSE.
What is a secured debt? An unsecured debt?
Secured means that it is backed by a specific asset, unsecured means it’s not specifically backed by an asset, but rather by the companies “credit worthiness”
Commercial mortgage, mortgage bond, lease
Commercial: most popular. secured by fixed property such as a building
Mortgage Bond: asset backed and may be traded
Lease: the bank keeps it and leases it to you
private placement
this is getting a loan from a private investor (bank)
Public issue and underwrite
usually unsecured and results in bonds that are traded in established markets. An underwriter will purchase the whole thing and then resell it to the public
Capital structure
the mix of debt and equity financing chosen by a firm, and is represented by a debt/equity ratio
financial restructuring is when a firm alters its _____-____ ______ without altering its assets
debt-equity ratio
Why would a company choose debt that caused interest payments rather than selling equities and paying dividends?
because there is a tax break for interest payments but not for dividends
What is the ultimate fear of firms and their investors
bankruptcy…. duh
The ______ ______ ______ asserts that well organized equity markets, such as the NYSE, are efficient markets, at least as a practical matter.
efficient market hypothesis (EMH)
What is the total market value of a firm
the amount required to buy the firm free and clear including ownership equity and debt (like a used car, the price to buy it and repair anything needed).
first Modigliani-Miller Theorem (MMT1)
ignoring bankruptcy, taxes, informational asymmetries, and managerial incentive problems, the total market value of the firm is independent of its capital structure….
No matter how cut up pie it adds up to one pie
