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failed8v
10-21-2002, 12:24 PM
I am in 8V, but this is a general question.

Is it possible to have Debt equity ratio > 100%.

The confusion arises with the term equity; sometime it refers to assets-liability (i.e. surplus), sometime it is total market value of all the shares
(does it?)

If I go with equity=assets-liability, then what is debt (=liability?).

I guess I am mixing up holding bonds (=debt, wrong?) as assets with borrowing (debt capital) .

As I was typing this message, it started to make sense but a clearer concise explanation would help more.

Thanks,

Double High C
10-21-2002, 12:35 PM
1. yes, it is theoretically possible to have (debt/equity) &gt; 1
For example, if the firm has debt of \$2, no other liability, and if their total assets were to fall to \$3, then equity would be \$1, and D/E would equal 2/1 = 2.

(The plausibility of this happening in the real world is another matter.)

2. "Company Statement" value of firm: Assets - Liabilities

3. Market value of firm:
(Value of outstanding shares) x (1/pct held by public)

failed8v
10-21-2002, 12:54 PM
1. yes, it is theoretically possible to have (debt/equity) > 1
For example, if the firm has debt of \$2, no other liability, and if their total assets were to fall to \$3, then equity would be \$1, and D/E would equal 2/1 = 2.

(The plausibility of this happening in the real world is another matter.)

2. "Company Statement" value of firm: Assets - Liabilities

3. Market value of firm:
(Value of outstanding shares) x (1/pct held by public)

Thanks for the clarification. About your third point, is it consistent with
M&M proposition(MV of a firm = MV of equity stock + MV of its debt)?

Double High C
10-21-2002, 01:17 PM
1. yes, it is theoretically possible to have (debt/equity) &gt; 1
For example, if the firm has debt of \$2, no other liability, and if their total assets were to fall to \$3, then equity would be \$1, and D/E would equal 2/1 = 2.

(The plausibility of this happening in the real world is another matter.)

2. "Company Statement" value of firm: Assets - Liabilities

3. Market value of firm:
(Value of outstanding shares) x (1/pct held by public)

Thanks for the clarification. About your third point, is it consistent with
M&amp;M proposition(MV of a firm = MV of equity stock + MV of its debt)?

Let me first restate my point #3, simplifying it to remove the second term (and hence, let's assume that all of the value has been sold as stock).

Market value of firm = Value (i.e. price) of outstanding shares

My thought is that the (market) value of the debt should be reflected in the stock prices (along with the assets that were borrowed, and/or any assets financed by the borrowing), so no term ought to be subtracted (which is what I assume that you meant to do).

(I assume that "equity stock" is synonymous with price of all shares held, i.e. value of equity; if I am way off base here, it is probably an issue of nomenclature; I am not taking 8V, and don't think that I am familiar with your source, M&amp;M. Having said that, I recall general principles, e.g. from Course 220, and am now taking 8I.)

failed8v
10-21-2002, 01:38 PM
(I assume that "equity stock" is synonymous with price of all shares held, i.e. value of equity; if I am way off base here, it is probably an issue of nomenclature; I am not taking 8V, and don't think that I am familiar with your source, M&M. Having said that, I recall general principles, e.g. from Course 220, and am now taking 8I.)

Thanks. M&M=Modiglianni & Miller.
In an earlier thred, you had (?) some thoughts on Fair values of liabilities, which indicates that there is no agreement about FVL in the practise.

M&M is cited as a passing remark in one of Luke Girards paper. I am trying to make (last minute) sense out of the paper.

Double High C
10-24-2002, 06:32 PM
In an earlier thred, you had (?) some thoughts on Fair values of liabilities, which indicates that there is no agreement about FVL in the practise.

M&amp;M is cited as a passing remark in one of Luke Girards paper. I am trying to make (last minute) sense out of the paper.

From reading (and rereading) the Income Based Reserves paper (on 8I, at least), I recall that as well as FVA, the Aussies' also use (paraphrasing) "assumptions for Liabilities that are consistent with the assumptions used for the assets". I guess this is quasi- FVL.