Problem: 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.
(c) Equity
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 https://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.
(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.