A treasurer needs $200M and has to choose: issue stock, float bonds, or lease the equipment. Each route hits the cost of capital, control, and tax shield differently. Raising capital is the discipline of matching the instrument to the need.
Money markets trade debt with maturities under one year (T-bills, commercial paper). Capital markets trade longer instruments (bonds, equity). Primary markets transfer new securities from issuer to investor; secondary markets transfer existing securities among investors. Exchanges (NYSE, Nasdaq) match orders centrally; OTC markets quote bilaterally through dealers. Auction markets cross bids and asks; dealer markets post bid-ask spreads.
The Efficient Market Hypothesis has three nested forms.
- Weak form. All past price and volume data is impounded in price. Technical analysis cannot generate excess returns.
- Semi-strong form. All publicly available information (filings, news, analyst reports) is impounded. Fundamental analysis cannot generate excess returns. Most US equity markets are considered semi-strong.
- Strong form. Even private (insider) information is impounded. Nobody, including insiders, can earn abnormal returns. Empirically rejected; insider trades do beat the market, which is why they are regulated.
Common mistakes
- Discounting lease flows at the WACC. Use the after-tax cost of debt because lease commitments are debt-like fixed claims.
- Forgetting the lost salvage in NAL. When you lease, you forfeit the residual value. Subtract its PV from the lease side, or equivalently from buy savings.
- Confusing ex-dividend with record date. Ex-dividend is one business day before record. The price drops on the ex-date.
Bottom line
- Primary markets sell new securities and deliver proceeds to the issuer; secondary markets (NYSE, Nasdaq, OTC) trade existing securities among investors with no cash to the issuer.
- Market efficiency nests: weak (past prices priced in, technical analysis fails), semi-strong (all public info priced in, fundamental analysis fails), strong (even insider info priced in, no one beats the market).
- Credit ratings price directly into yield, so a downgrade raises the required rate; the investment-grade floor sits at Baa3/BBB-.
- Investment banks underwrite (firm commitment vs best efforts), advise, and trade; in best efforts the issuer bears price risk.
Exam shortcut
When a lease question asks for the discount rate, the answer is the after-tax cost of debt, not WACC. Lease obligations are debt substitutes. When asked which form of market efficiency is violated by a trading strategy, map the data: past prices to weak, public info to semi-strong, insider info to strong. The form that "still allows" the strategy is the violated one.
The full lesson (about 1,747 words, 12 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- 2B3
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