An investment vehicle, the investee, is created and financed with a debt instrument held by a debt investor and equity instruments held by some other investors. The equity tranche is designed to absorb the first losses and to receive any residual return from the investee. One of the equity investors who hold 30% of the equity is also the asset The investee uses its proceeds to purchase a portfolio of financial assets; thus, exposing them to the credit risk associated with the possible default of principal and interest payments of the assets. The transaction is marketed to the debt investor as an investment. Such investment has minimal exposure to the credit risk associated with the possible default of the assets in the portfolio. It is because of the nature of the assets and of the equity tranche. The returns of the investee are significantly affected by the management of the investee’s asset portfolio. Managing the asset portfolio includes decisions about the selection, acquisition, and disposal of the assets within the portfolio guidelines. All those activities are the responsibilities of the asset manager. However, when defaults reach a specified proportion of the portfolio value, a third-party trustee will now manage the assets according to the instructions of the debt investor. Managing the investee’s asset portfolio is the relevant activity of the investee. The asset manager can direct the relevant activities until defaulted assets reach the specified proportion of the portfolio value; the debt investor can direct the relevant activities when the value of defaulted assets surpasses that specified proportion of the portfolio value. Questions: Is the investment vehicle a business? Justify your answer in no more than five (5) sentences. In no more than five (5) sentences, discuss how to determine who between the asset manager and debt investor has control over the investment
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
- An investment vehicle, the investee, is created and financed with a debt instrument held by a debt investor and equity instruments held by some other investors. The equity tranche is designed to absorb the first losses and to receive any residual return from the investee. One of the equity investors who hold 30% of the equity is also the asset
The investee uses its proceeds to purchase a portfolio of financial assets; thus, exposing them to the credit risk associated with the possible default of principal and interest payments of the assets. The transaction is marketed to the debt investor as an investment. Such investment has minimal exposure to the credit risk associated with the possible default of the assets in the portfolio. It is because of the nature of the assets and of the equity tranche.
The returns of the investee are significantly affected by the management of the investee’s asset portfolio. Managing the asset portfolio includes decisions about the selection, acquisition, and disposal of the assets within the portfolio guidelines. All those activities are the responsibilities of the asset manager. However, when defaults reach a specified proportion of the portfolio value, a third-party trustee will now manage the assets according to the instructions of the debt investor.
Managing the investee’s asset portfolio is the relevant activity of the investee. The asset manager can direct the relevant activities until defaulted assets reach the specified proportion of the portfolio value; the debt investor can direct the relevant activities when the value of defaulted assets surpasses that specified proportion of the portfolio value.
Questions:
- Is the investment vehicle a business? Justify your answer in no more than five (5) sentences.
- In no more than five (5) sentences, discuss how to determine who between the asset manager and debt investor has control over the investment
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