Equity value
Encyclopedia
Equity value is the value of a company available to owners or shareholders. It is the enterprise value
plus all cash and cash equivalents, short and long-term investments, and less all short-term debt
, long-term debt and minority interests.
Equity value accounts for all the ownership interest in a firm including the value of unexercised stock options and securities convertible to equity.
From a mergers and acquisitions
academic perspective, equity value differs from market capitalization
or market value in that it incorporates all equity interests in a firm whereas market capitalization or market value only reflects those common shares currently outstanding.
Equity Value =
Market capitalization
+ Amount that in-the-money stock options are in the money
+ Value of equity
issued from in-the-money convertible securities
- Proceeds from the conversion of convertible securities
The fair market value method is as follows:
Equity Value =
Market capitalization
+ fair value of all stock options
(in the money and out of the money), calculated using the Black–Scholes formula or a similar method
+ Value of convertible securities
in excess of what the same securities would be valued without the conversion attribute
The fair market value method more accurately captures the value of out of the money securities.
Enterprise value
Enterprise value , Total enterprise value , or Firm value is an economic measure reflecting the market value of a whole business. It is a sum of claims of all the security-holders: debtholders, preferred shareholders, minority shareholders, common equity holders, and others...
plus all cash and cash equivalents, short and long-term investments, and less all short-term debt
Money market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
, long-term debt and minority interests.
Equity value accounts for all the ownership interest in a firm including the value of unexercised stock options and securities convertible to equity.
From a mergers and acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
academic perspective, equity value differs from market capitalization
Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
or market value in that it incorporates all equity interests in a firm whereas market capitalization or market value only reflects those common shares currently outstanding.
Calculating Equity Value
Equity value can be calculated two ways, either the intrinsic value method, or the fair market value method. The intrinsic value method is calculated as follows:Equity Value =
Market capitalization
Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
+ Amount that in-the-money stock options are in the money
+ Value of equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
issued from in-the-money convertible securities
Convertible security
A convertible security is a security that can be converted into another security. Most convertible securities are bonds or preferred stocks that pay regular quarterly interest and can be converted into shares of common stock if the stock price appreciates to a predetermined...
- Proceeds from the conversion of convertible securities
The fair market value method is as follows:
Equity Value =
Market capitalization
Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
+ fair value of all stock options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
(in the money and out of the money), calculated using the Black–Scholes formula or a similar method
+ Value of convertible securities
Convertible security
A convertible security is a security that can be converted into another security. Most convertible securities are bonds or preferred stocks that pay regular quarterly interest and can be converted into shares of common stock if the stock price appreciates to a predetermined...
in excess of what the same securities would be valued without the conversion attribute
The fair market value method more accurately captures the value of out of the money securities.