Advanced Finance Terms and Symbols

rf

Risk free rate, interest rate of gov bonds

rm

estimated return of stock market

Beta

sensitivity of asset to fluctuations in the market, represents systematic risk or market risk

MRP

Market risk premium- difference between market returns and risk free rate, represents aditional return investors demand of market- (rm-rf)

Equity cost of capital

CAPM result

Cost of equity

Drawn credit lines (revolving debt)

bank loan with credit line where company can withdraw needed money

Term loans

bank loan with fixed maturity, long or short term

Senior bonds and notes

These have highest priority for repayment at time of liquidation or bankruptcy

Subordinated bonds and notes

In event of liquidation or bankruptcy, only paid out of funds remain after paying off senior debt

Capital leases

Leasing machinery or equipment instead of buying it, rental is both asset and liability on balance sheet and subject to depreciation

Collateral

bank debt secured by collateral, if company defaults bank will take collateral

Bonds are unsecured

if company defaults, bondholders take over business

D

Initial Value of debt= Outcomes/ rfr

VU

Equity without leverage= outcomes/rfr

Equity without leverage (VU)- Initial Value of debt (D)

Initial Value of Equity (E)

VL

Total Value with Leverage- in perfect markets euqal to VU