Question

4) Fixed Assets: 915 642 947 TL, Current Assets: 377 851 878 TL, Short-Term Liability: 238 802 542 TL, Long-Term Liability:210 752 421 TL, Total shares: 191 447 068,

According to above information, calculate financial leverage, net working capital, equity and equity value per share.

Answer 1

The Question has 4 points:-

1. Value of Financial Leverage.

2. Value of Net Working Capital

3. Value of Equity of Business

4. Equity value per share

Answer to 1: Value of Financial Leverage

Definition: Ratio that defines senstivity in fluctuations of company's overall profitability to volatility of its operating income caused by changes in its capital structure is known as Financial Leverage.

Benefit of calculating Financial Leverage: It is one of the method to quantify a company's financial risk.

Formula for calculaion of Leverage: Total company's Debt / Shareholder's Equity

Where,

Total Company's debt = Short term debt + Long Term Debt

Company's shareholder equity = Number of outstanding company shares * Equity value per price

Now we can calculate Company's Debt easily as Short term debt value and long term debt value is readily given in question. So, first of all we should start with calculating value of shareholder equity.

Total shareholder fund = Total assets - total debt

= (Current Assets + Fixed Assets) - (Short term Debt + Long term Debt)

= (377,851,878 + 915,642,947) - (238,802,542 + 210,752,421)

= 1,293,494,825 - 449,554,963

= 843,939,862

Now we can calculate Financial Leverage easily,

Leverage = Total Debt / Total Shareholder Equity

= (Short term Debt + Long term Debt) / Total Shareholder Equity

= (238,802,542 + 210,752,421) / 843,939,862

= 0.53 (Rounded off)

Answer to 2: Value of Net Working Capital

Definition: Liquidity calculation which measures a company’s ability to pay off its current liabilities with current assets is known as Net Working Capital.

Benefit of calculating Net Working Capital: it shows the firm’s short-term liquidity as well as management’s ability to use its assets efficiently.

Formula for calculaion of Net Working Capital: Currents Assets - Current Liabilites (including short term debt)

We can calculate its value easily as both the values are given in question,

Note: In question only short term debt is given and no other Current Liability is given, hence we are assuming that the company has only short term debt as Current Liability.

Net Working Capital = Currents Assets - Current Liabilites

= 377,851,878 - 238,802,542

= 139,049,336

Answer to 3: Value of Equity

Value of Equity means value of shareholder's equity. We have already calculated shareholder's equity in part 1 of this quetion. Hence,

Value of Equity = Total Shareholder's Equity

= 843,939,862

Answer to 4: Equity Value per share

This is very simple part of this quetion. We have already calculated everything.

Formula for calculaion of Equity Value per share: Total Shareholder's Equity / Total no. of shares

Equity value per share = Total Shareholder's Equity / Total no. of shares

= 843,939,862 (as calculated in part 1 and part 3) / 191,447,068 (as given in question)

= 4.41 (rounded off)

Summary of the question:-

We have been given some value of a business and we wanted to calculate some other values. Here are the answers -

1. Financial Leverage = 0.53 (Rounded off) - Not in currency as this is a ratio

2. Net Working Capital = 139,049,336 TL

3. Value of Equity = 843,939,862 TL

4. Equity value per share = 4.41 TL (rounded off)