Chapter 13 - Financial Leverage

Debt Capacity

the notion that there is some range of debt that maximizes the value of the firm.

Arbitragers

investors who search for extremely quick and low-risk profits

Financial Leverage

the use of debt. Financial leverage is created when the firm borrows money in the form of debt.

Unlevered Firm

a firm that finances its assets with 100% equity capital such that there is 0% debt in its capital structure.

Levered Firm

a firm that finances its assets with both debt and equity capital such that there is debt in its capital structure.

Perfect Markets

markets that operate under highly restrictive assumptions such as zero tax rates, no transaction costs, and full information of all market participants.

Financing Decision

the decision as to which securities the firm will issue in order to raise money to finance the firm's assets. The financing decision is also known as the capital structure decision or the debt-to-equity decision.

Leverage Factor

the ratio between the firm's assets and the firm's equity

Homemade Leverage

the replication of the corporate leverage decision by the investor at little cost.