Ann: Market Guidance, page-96

Not typo. Maybe there are grammatical problems with the sentence.

But what I mean is this.

Slater has 200 mil market cap and 700mil inherent debt, so the total bet is 900mil. The person buying Slater expects the value to be between say 1200-2500mil, depending on how optimistic they are. Let's say they think Slater should be 1400, and they are right. Their profit is 1400 - 900 = 500. All this with a small bet of 200. However, if they are wrong, and the real value sinks to below 700mil, which is half of their original estimate, then Slater is effectively bankrupt, and their lose all their investment. It's like a mortgage on a house, people say houses can't go to zero, and they are right, but their position can easily go to zero depending on their debt level.

Shine has 100mil market cap and 30mil inherent debt, so the total bet is 130mil. To achieve the same ratio of debt to equity as Slater, which is 7/2, Shine has to have a debt of 350mil. But they only have 30mil inherent debt at the moment, so 320mil short. So we have to take on margin loans or bank loans or what ever loans you can self create of around 320mil to self 'simulate' the same risk level as Slater for your own position. Once you do that, you can then do the numbers on fair value estimate to see which one gives better return on the same risk adjusted basis.

This might sound a little bit arcane and complicated, but it is the best way to compare investments with different risk profiles. I've worked out the numbers and Shine is far more profitable on a risk adjusted basis, with even extremely conservative fair value targets for Shine and very liberal fair value estimate for Slater based on current information. I'm not going to do the numbers here since others will go crazy and nitpick on small things when they do not understand my assumptions and explanations. But if you are good with numbers you can just do the maths yourself and you will see what I mean, it's not even close.