Debt-to-Equity Market Value, is the Long-term Debt over the Market Value of the company. This is another measure of a company's financial structure, as defined by the amount of longterm debt proportionately to the value which the market attributes to the equity capital of the company. Again, for this ratio to convey meaningful information, it should be compared with the straight Debt-to-Equity ratio.

The calculation is as follows: Debt-to-Equity Market Value Ratio = (Long-term Creditors + Short-term Creditors + Subordinated Loans + Insurance Funds) / Market Capitalization Observe that, as we discussed in our class notes: Equity fair value critically depends on expected earnings, equity book value and earnings volatility. The above holds because the firms always have an option to default on equity holders and liquidate assets. Meanwhile, research shows that debt value increases when earnings become more volatile in the proximity of default (this is not something we covered). The rationale for this is that increased earnings volaitlity allows firms to use 'good' periods of earnings to refinance debt at lower interest rates, raising price of debt.

Considering the concept of Debt-to-Equity MV Ratio above, suppose we have three companies: All have total capital at $1 billion

	long term creditors	short term creditors	subordinated loans	insurance funds	market cap
company A	500 million	300 million	200 million	0	2 billion
company B	500 million	200 million	300 million	0	2 billion
company C	200 million	300 million	500 million	0	2 billion

All three companies have identical Debt-to-Equity MV Ratios. All three companies experience identical shocks to their revenues. Based solely on the above differences in companies debt structure, which company would you expect to have the highest probability of liquidation? Which one the lowest probability of liquidation? Explain your reasoning.