1. The Capital Stack
We'd like to introduce a term that you're likely to encounter called the
capital stack. And when we discuss how to optimally finance various capital
investments, the capital stack really refers to the optimal mix of equity,
debt, or a mix of the two. For example, in order to finance
a business, the company may have senior debt, some subordinated debt,
and then some equity. You can see that these pieces of capital are
often stacked vertically, hence the name the capital stack. And on the top,
we're showing the lowest risk investments like senior debt,
going down to the highest risk investments at the bottom, like equity.
2. Let's practice!