Balance Sheet and Market Value of Your Company's Liabilities and Equity
Refer to Time Warner's most recent balance sheet. Review the 'liabilities and equity side' of the balance sheet.
(a) Short term liabilities (or debt)
Find out from the balance sheet of the company the total of the short term liabilities (also called 'short term debt'). You may assume that the market value of the short term debt is equal to the balance sheet or the 'book value' of the short term debt.
(b) Long term liabilities (or debt)
You may assume that the market value of the long term liabilities is equal to the balance sheet values.
The market value of equity is by definition equal to the number of shares outstanding times the market price per share. Find out the number of shares outstanding and the recent price per share. Then multiply one by the other in order to find the market value of equity of your company. If you have a problem finding the number of shares outstanding you may go to http://finance.google.com and insert the name of your company (Time Warner). The market value of equity of your company is what is called 'Mkt Cap' (that is, Market Capitalization) that is market capitalization. An alternative site is http://finance.yahoo.com where again you insert Time Warner's name and get the market capitalization.
(d) The Market Value of the Enterprise
Now prepare a table that contains the following:
Company name:...(Time Warner)
Source of Funds Balance sheet Values
As of .... (date) Market Values
As of ... (date)
Short term liabilities
Long term liabilities
Total shareholders equity
Total liabilities and equity
Compute the debt ratio of Time Warner(total liabilities divided by the total liabilities plus equity) and the debt to equity ratio, (total liabilities divided by total equity) once based on balance sheet values and once based on 'market values'. What can you learn from comparing each of these ratios when they are based on 'balance sheet values' and when they are based on 'market values'? Write a two to three page report on the results of your computations.
Kindly see the attached file for the calculations.
The above ratios indicates solvency position
The long-term creditor is concerned with both the near-term and the long-term ability of a firm to meet its commitments. Long-term creditors are usually protected to some degree by restrictive covenants, or rules, in loan agreements that restrict the firm's ability to take actions that are not in the best interests of the creditors. Before entering into a loan agreement, creditors very carefully examine the firm's financial condition and pay particular attention to the following two ratios.
Debt-to-Equity Ratio. Long-term creditors would like a reasonable balance between the capital provided ...
This explains the steps to compute Balance Sheet and Market Value for Time Warner