FIN 502 Lecture Notes - Lecture 11: Stock Market, Overdraft, Reinvestment Risk
10 Apr 2018
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Solvency- long run ability of the family to pay its debts. Consumer credit- borrow money to buy goods and services. Overdraft protection- kind of unsecured line of credit payday loans offers small for short periods borrower writes a post- dated cheque for the amount of the principal plus interest . Percentage allowed varies among the lenders; 30-50% of net pay. Two kinds of assets that we can buy with borrowed money; assets for consumption purposes and assets for investment purposes-> assets generally increase in value over time and generate cash flow in future. If you borrow money to invest the interest expense is tax deductible pay less income tax whereas if you borrow money to consume the interest expense are not tax deducible. Pay cash for consumption and borrow money for investments. D/e ratio: (1+x)k-xi=r r=return, x=d/e ratio, k=expected return. Direct market comparison approach (dmc)- comparing prices at which similar properties have been sold must have data.
