About the issue of modeling the effect of principal financial indicators on the cost of companies (by the example of financial leverage modeling) (ABSTRACT)

George Tomaradze

The article deals with the effect of financial lever changes on the cost of companies. Various financial factors evaluate the business and state of a company in accordance with five different but interrelated directions: evaluation of property state, liquidity, solvency, financial sustainability, indicators of profitability and business activities.

The common drawback in making comparisons via the indicators is a lack of methodologically-grounded general evaluation method of company’s state. The method for evaluation of company cost by means of discounting of free money flows provides a sound estimation of company’s efficiency from the viewpoint of its owners. To promote different aspects of company’s business, it is necessary to determine the influence power of different financial factors on company cost.
In case of financial leverage it is shown that simple identical mathematic transformations might help to determine the condition of company cost maximization as a function from the relation of changes of borrowed funds toward own capital. Hence, all things being equal, with the given financial leverage a maximum company cost is established, and the structure of capital with which an absolute maximum of company cost is achieved is an optimal policy for financial leverage. It helps to determine if it is worth to substitute a borrowed capital with own one or vice versa.
Similarly, it is possible to model the effect of other financial indicators on company cost. By determining the elasticity of company cost toward different financial indicators, it is possible to determine the share and accordingly, the influence power of an appropriate factor on the increase/decrease of company cost, which gives an opportunity for optimization of company’s financial policy.