Equity vs. debt발음듣기
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Equity vs. debt
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Everything we've talked about so far with this startup company selling socks and all of that, has been raising money from an equity.발음듣기
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We raised private money - when the company was private it went to VCs and it went to angel investors, and maybe you could go to your friends and family to raise money.발음듣기
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So this is why this playlist is called capital markets, or it's part of it, the name of raise capital.발음듣기
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Capital is just essentially - I mean the easy way to think about it is you're raising cash that you want to invest in some way to grow your business or to sustain your business or start your business.발음듣기
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So everything we talked about so far was equity, and that's essentially selling shares in your company to raise money.발음듣기
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The equity investor - so when you sell equity, you're essentially selling - you're kind of making that person who's buying the stock - you know, an equity is the same thing as stock - you're making the person who's buying a stock kind of a partner in the company.발음듣기
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So if the company - let's say there's two situations - if the company goes bankrupt - and I'll talk a lot more about what bankruptcy even means - but if the company goes bankrupt, all the shareholders end up with nothing.발음듣기
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If this was a company, that start-up that we talked about, if it turns into Amazon.com and becomes a billion-dollar company, everyone is going to do really well.발음듣기
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But there's another way to raise money, and actually this is probably something that's more familiar at the household level.발음듣기
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You never say, you know what - well you can, but you're not going to say hey, I need to buy a house, why don't I go to my rich friend and offer to sell 10% of the stake in my house to him and he'll be kind of a partner in my house.발음듣기
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So what's good about debt is it's - so let's think about it from the point of view of the person who's lending the money to you.발음듣기
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I'm like hey, I got a great business, why don't you give $1 and then you get a 20% cut of my business.발음듣기
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Debt says regardless of how my business does, if it does awesome all you're going to get is the interest.발음듣기
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Even if my company becomes the next Google or Microsoft or whatever else, that person's just going to get 9% on their money.발음듣기
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Because they're going to get their money back at a certain - you know, there's a certain payment schedule.발음듣기
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And they're going to get their money back before the stockholders - so let's say in a situation where the company's going into difficulty - and we'll do a whole playlist on bankruptcy - the people who lend money to the company will see their money before the stockholders see anything.발음듣기
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If you wonder what a CFO at a company does, this is really the main decision that they're always making.발음듣기
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Do we raise money - well, how do we raise money if we need it, and do we raise money from the equity markets or from the debt markets?발음듣기
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We'll actually look at real company balance sheets and decipher what all of the terms on the balance sheet mean.발음듣기
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And the other interesting thing about when a company's public - remember, every time when a company was private and it took an investor, when it took equity investors, they had to sit and have a negotiation saying what is this worth?발음듣기
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But what's cool is, is when you have a publicly traded company, these shares are traded on an exchange, right?발음듣기
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So let's say that this is this could have been its IPO date or it could just be the start that we're looking at, and let's say the stock IPO went up, and then the whole market went down a little bit.발음듣기
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But on any given, really almost any given second, there's a price that somebody traded that stock at and it might not be the best price, but it is a price.발음듣기
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And we'll talk about why that happens, because you might have 10 million shares, and if only, I don't know, 100 shares get traded at any second, or let's say only 100 shares get traded in the day, is that an indicative price?발음듣기
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But anyway, we'll talk more about what volume means relative to the total float and all of that.발음듣기
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Traded at $15 a share, and you could look it up on your Bloomberg terminal or whatever else.발음듣기
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So that means that the market at that moment is valuing this company at $15 per share times 10 million shares.발음듣기
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And since this piece is the same size as the assets, we have nothing else on the right-hand side, the market's essentially saying that the assets right now are worth $150 million.발음듣기
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We'll see probably in a few videos when you start raising debt you have to do an extra calculation to figure out what the asset value or - and I'll throw out a new term here, the enterprise value of the firm is.발음듣기
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So if I'm the CFO of this company, and let's say we need to raise another, I don't know, $15 million.발음듣기
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I could say OK, the company is trading at $15 per share, I need to raise $15 million, so I could issue another million shares.발음듣기
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But it would be a follow-on offering where I would issue, I'd go to the board, we would essentially create another million shares, and then sell them into the market, and hopefully people will buy it at $15 a share or probably a little bit less because we're kind of flooding the market with a ton of shares.발음듣기
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We didn't have to go to all this - I mean, for the most part we didn't have to do this huge valuation exercise and negotiations and do all of this, hire banks and all that.발음듣기
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Or the other option is we're an established company, we're generating cash, we could make interest payments if we want to.발음듣기
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And let's say we want another $2 million, but this time instead of selling shares - so right now how many shares do we have?발음듣기
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Let's say, you know what, let's say as a CFO I feel like our shares are going to move up a lot more.발음듣기
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They might have just gone to Bank of America and said hey, we're a big company and we're good for the money, why don't you lend us $3 million.발음듣기
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And Bank of America feels good because you have a high - we'll talk more about credit ratings and all of that - but they say oh, you have essentially a good company credit score.발음듣기
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And before these guys see it - let me do to it in the - before these equity holders - this is the equity holders right now - before the equity holders see anything, these guys have to get paid their interest.발음듣기
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Now all of a sudden your assets, which is that side - I know I just keep writing over the same drawing - your assets are now larger than your equity.발음듣기
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I think now, and this is just kind of a review of the balance sheet video, you see that the assets are equal to your equity, which is this right here, your equity plus your liabilities.발음듣기
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So if you wanted to know what your assets are worth, because your assets are equal to your equity.발음듣기
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And let's say the stock plummets to $10 a share for some strange reason or for a not-strange reason.발음듣기
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So what's the market cap? $10 a share, 11 million shares, we have a $110 million market cap.발음듣기
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So we could say that for the most part the market value of our assets, the market thinks that this entire left-hand side is going to be worth the value of our equity, the market cap of the company, plus the amount of debt, which is equal to $113 million.발음듣기
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So the value of these assets are $113 million, and that for the most part is the enterprise value of the company.발음듣기
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And we'll talk - there's a little bit of a tweak we'll do in the future on enterprise value.발음듣기
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A lot of people when they do a market capitalization calculation they say oh, that's what the company's worth.발음듣기
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If you want to know what the company's worth, you have to take the market cap and then add the debt.발음듣기
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Another way - well, I won't get too complicated because I just realized I've run out of time again.발음듣기
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