CFA Equity Flash Cards

Enterprise Value

Market Capitalization + Marker value of preferred shares + Market value of debt - Cash and short term investments

EBITDA definition

Earnings before interest, taxes, depreciation, and amortization.

Asset based valuation use case

valuing private firms, resource companies, and firms with few intangibles.

Forward Contract Definition

An agreement to trade an asset in the future at a predetermined price.

Three Pillars of Arbitrage

Zero Risk, Zero Net Investment, Positive Return.

Securitizers

Pools assets (e.g. mortgages) and sell securities that represent ownership in the pool

Special Purpose Vehicles (SPVs)

Used For Pass Through Securities (Such as Mortgage Backed Securities) by Securitizers (Fannie May Freddie Mac) to keep securitized assets off of their balance sheet

Price of Margin Call Formula

Price of Margin Call = Loan amount/(1 - Maintenance Margin %)

Short Selling Margin Requirements

Short Sellers must maintain initial equity greater than or equal to their margin requirement X Short Position Value

What are some determinants of the size of Bid/Ask spread

Highly liquid assets have a tighter spread, volatile assets have a wider spread, Information asymmetry widens spread.

Components of a well functioning financial system

Complete Markets, Operational Efficiency, Information Efficiency