Loan to value is an abbreviation written as LTV, but it is an index to measure the safety of borrowings. Sometimes loan-to-value is called borrowing ratio. It is the collateral ratio when banks make loans with the debt ratio to the asset value. The loan-to-value is a measure of high / low leverage. Ideal loan-to-value in a company is called “optimal capital structure”. If we increase the leverage up to a certain percentage, the yield on investment will increase and efficient investment activities will be possible. However, if leveraged too much, the borrowing interest rate will increase with the increase of the risk that the render has, which may result in a decline in investment efficiency. When a financial institution lends out, the value of the collateral (real estate, stock etc.) of the loan is calculated from the viewpoint of securing the safety of the financial institution. It is common to multiply the collateral value by a certain rate and lend it up to that amount. For example, deposits become 100% as collateral value, 80 to 90% if it is a stock of a good listed company, up to 80% if it is a real estate may be evaluated. This percentage is referred to as “collateral” (the ratio when valued lower than the collateral property price) and has been introduced for a long time from the long ago from the viewpoint of ensuring the safety of financial institution loans.
Loans to value is indispensable in cases such as M & A
Although loans are made in this way, in order to calculate corporate value in the case of M & A etc, loan-to-value that evaluates the safety of borrowing is indispensable. The higher the loan-to-value is, the more collateral is the higher the risk. Therefore, when there is much loan-to-value borrowing at the time of M & A, the corporate value becomes lower. If M & A does not exceed M & A if the buyer’s value does not exceed the seller’s value (the selling price desired for the seller), it will not be found good, but it will be difficult to establish if the buyer does not have that much value. The low loan-to-value and high safety borrowing is the merit of the acquiring side, which will increase the seller’s value. As this way affects the corporate value and also relates to the purchase price, it is always treated as one of the indicators that is calculated and referred to when making M & A.