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![nvidia book value of debt nvidia book value of debt](https://www.netcials.com/tools/phpgraphlib-master/image/usa-financial-net-worth/NVIDIA-CORP-net-worth-highest-week.png)
![nvidia book value of debt nvidia book value of debt](https://iknowfirst.com/wp-content/uploads/2020/05/NVDA_article_Yiqin_2-555x442.png)
debt) leading to an increase in shareholder wealth. equity) is replaced by the cheaper alternative (i.e.
![nvidia book value of debt nvidia book value of debt](https://iknowfirst.com/wp-content/uploads/2020/05/NVDA_article_Yiqin_6-555x143.png)
This is because when debt-to-equity level increases, the more expensive source of finance (i.e. Increase in the required return of investors and lenders means an increase in the cost of capital to the company.Ī higher debt-equity ratio however is not always a bad thing. This is because debt is a cheaper source of finance compared to equity because of tax savings (dividends are not tax deductable) and predictable return for lenders. Therefore, when the financial risk is at an acceptable level, increasing the debt-to-equity level could benefit the company through a reduction in the cost of capital. Obviously, this is not good for investors and lenders because it increases the risk associated with their investment or lending which causes them to require a higher rate of return to compensate for the additional risk. When debt-to-equity ratio is high, it increases the likelihood that the company defaults and is liquidated as a result. Using market values for both debt and equity removes such inconsistencies and therefore provides a better reflection of the financial risk of an organization.ĭebt-to-equity ratio directly affects the financial risk of an organization.įinancial risk is simply the risk that a company defaults on the repayment of its liabilities. This can cause an inconsistency in the measurement of the debt-equity ratio because equity will usually be understated relative to debt where book values are used. interest on bank loan is usually adjusted periodically in line with prevailing market interest rates). due to historical cost convention and impairment losses) whereas the book value of debt remains relatively close to its market value (e.g. This is because book values of assets (and hence equity) are usually lower than their market value (e.g.
![nvidia book value of debt nvidia book value of debt](https://developer-blogs.nvidia.com/wp-content/uploads/2020/10/SHAP-value.png)
Arguably, market value (where available of course) provides a more relevant basis for measuring the financial risk evident in the debt-to-equity ratio. Should Debt-Equity Ratio be calculated using market values or book values of debt and equity?īoth market values and book values of debt and equity can be used to measure the debt-to-equity ratio.
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