In discussing the maturity model and the duration model, we talked a lot about the market...

In discussing the maturity model and the duration model, we talked a lot about the market value of equity.(i)What is meant by the market value of equity?(ii)What does it mean when the market value of equity is negative?(iii)Give examples of shocks that might cause the market value of an FI to become negative (whereas it was positive before the shock)?(iv)What factors could reduce the likelihood of an FI’s equity turning negative?

Solutions

Expert Solution

1) Market value of equity can be defined as the total value of a companies equity. It is also known as market capitalisation. The measure of a companies value is calculated by multiplying the current stock price by total number of shares outstanding. Investors looking for buying companies can look the market value of company by checking the equity section of the balancesheet.

2) market value of equity is used by investors to determine or evaluate the financial health of a company. A negative value for equity comes when the liabilities exceeds the assets. some common reasons for this situation are the following.

a) Large didvdend payments.

b) Accumulated losses

c) Borrowing money

d) Ammortisation of intangible assets.

These are the main reasons which leads to the negative value of equity.

3) Shocks are the surprise events which may affect the investment in both negative and positive manner. Here we talk about the negative situation arising and few examples of that. Few negative shocks happening are the following.

a) Natural disasters

These unforseen events will affect the company in a bad manner. it can cause a lot of destruction and losses for the company which will defenetely affect the smooth functiong of the company.

b) Stock market crashes

Stock market crash can occur due to a lot of reasons in the economy. Anyway whatever the reason is, Once the stock market crash happens , The companies share value comes down which will defenitely make a negative impact on companies equity.

c) Terrorist attacks

This is a rare case but defenitely will cause a lot of losses to the company and will destroy the economy. This can also the affect the equity in a negative manner.

4) There a lot of factors to be kept in mind inorder to make our FI safe from becoming in to a negative equity. They are the following

a) Doesnt ignore the fundementals

b) Be careful of unnecessary risk taking

c) Proper debt restructuring

These are few points to be kept in mind inorder to protect company from becoming in to a negative equity situation.

jeff jeffy answered 1 year ago

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