book value of leverage

A simple analog is the leverage of a property bought on an (unsecured) commercial loan

Suppose the house was bought for $600k with $480k loan. After a few years, loan stays at $480 (to be paid off at maturity), but house doubles to $1.2m.

Book value of EQ is still 600-480 = $120k, but current EQ would be 1.2m - 480k = 720k.

The book value of leverage was and is still 600/120 = 5.0

The current value of leverage would be (1200k)/720k, which is lower and safer.

Now the bleak picture -- suppose AS value drops from 600k to 500k. Book leverage remains 600/120 = 5.0

Current value of leverage is 500/(500 - 480) = 25.0. Dangerously high leverage. Further decline in asset valuation would wipe out equity and the entire account is under water. Some say the property is under-water but i feel really we are talking about the borrower and owner of the property -- i call it the account.

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(Book value of) Leverage in "literature" is defined as

   (book value of) ASset / EQuity (book value)

Equivalently,

   (LIability + EQ) / EQ .... (all book values)

The denominator is much lower as book value than the current value. For a listed company, Current value of total equity is total market cap == current share price * total shares issued so far. In contrast, Book value is the initial capital of the founder + actual dollars raised through the IPO, ignoring the increase in value of each share. Why is this book value less useful? We need to understand the term "shareholder equity".  This term logically means the "value" of the shares held by the shareholders (say a private club of .... 500 teachers). Like the value of your house, this "value" increases over time.

finance calc ^ accounting calc

I'm trying to understand the relation between the finance perspective and the accounting perspective.

Financial data often fall into 2 categories - accounting data and financial data. For example, I believe live market data ("financial data") is largely irrelevant to accountants when updating the accounting records.

Accounting calc is strictly by the rule, a bit mechanical; finance calc is flexible and subject to interpretation.

When we hear of accounting, we think of the external (and internal) accounting firms, and financial reporting (yes accountant's job). I feel financial reporting has legal implications. Investors and regulators demand accurate calc. Therefore accounting rules are like laws. Breaking these rules is like breaking the law, falsifying and cheating tax authority and regulators, retail investors, institutional investors.

In my mind, "Finance" as a profession and discipline is about ... valuation of corporate and other securities ultimately for transactions. For eg, an investment is a transaction -- buying a security.

Finance is at a somewhat higher level than accounting?

fiscal ^ monetary measures

Government can influence (control? hard) its national economy by
Fiscal (FF) or Monetary (MM) policies.

MM is about money supply -- interest rate, bond-issues

FF is about the income/expenditure of the government -- taxation,
public spending, infrastructure building