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The ratio is found to be most effective predictor of bankruptcy than a similar, more commonly used ratio: net worth/total book value of debt.
As well as other authors DeMiguel and Pindado (2001), Chen (2004) and Delcoure (2006) have limited their works to the book value of debt ratio as a result of the shortcomings of data.
In fact, concerning our empirical study, we will work on the book value of debt ratio because there is also no sufficient data and we will use throughout this research two types of ratios to know: the ratio of total indebtedness which is equal to the carrying value of debt divided by the total assets and the debt ratio in the long term that is equal to the long-term borrowing on the total assets.
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In addition, several authors argue that this ratio must be calculated from the book value of the debt.
In lieu of past empirical literature and importance of the indicators including market value of equity to book value of total debt, 11 leverage ratios are chosen out of 25 financial ratios.
Except Bhumia and Sarkar (2011) all other studies (Bandyopadhyay (2006), Shetty et al. (2012) and Kumar and Rao (2015)) on Indian market have taken market value of equity to book value of total debt as ratio measuring leverage of the firms.
Leverage is measured as the book value of total debts divided by the book value of total assets.
Like these authors, we constructed the MBR by dividing the total of the firm's market capitalization value plus book value of long-term debt plus net current liabilities by the book value of total assets.
Leverage is (long-term debt plus short-term debt) divided by (book value of assets minus current liabilities plus short-term debt ((item 9 + item 34 / item 6 – item 5 + item 34)).
The asset book value of $2.1 billion was based on 2005 prices and debts were $1.6 billion consisting of bonds totaling $1.16 billion and bank loans of $440 million.
Italian banks are heavy with sovereign debt, so Moody's downgrade cuts the "book value" of their bonds.
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