Equity Value (Definition) | Formula | Example & Calculation
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Equity Value (Definition) | Formula | Example & Calculation

hello everyone hi welcome to the channel
of WallStreetmojo watch the video till the end also if you are new to this
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are going to learn a topic a tutorial on equity value so you can see a graph over
here and what we notice over here that we are comparing market cap of three
companies Exxon Apple and Amazon so let’s have a look at this graph of equity
market value of Exxon Apple and Amazon and we note that in 2007 in 2008
Exxon was far ahead in terms of the equity value it’s quite visible compared
to the Amazon and Apple however over the years you can see the market value of
the equity has increased and now they’re leading
companies basically you can say that over the years Apple and Amazon’s market value of the equity has significantly increased and now they are leading
companies by equity market value so does equity value even matter
that’s the question over here you can see the Exxon over here and this new
graph look at this of Apple and same with the Amazon even Amazon started
growing so why this thing is it equity what significance does equity value play
no issues let’s deal with this equity value now equity value is basically what
this right equity value no this will it is enterprise value EV equity value is
basically your summation or the sum total of the value of the shareholders
have made available for the business so equity value is also called
as your market cap right and can be calculated by multiplying the market
value per share which is your price into your number of shares that is P into and
so equity market value is very important for a business owner especially when he
plans out to sell the business and sells his business equity market value gives a
good measure of what a seller of a business would receive after the debt
has been paid so let’s have a look at some formulas of
equity value formula so I mean I could evaluate Formula so Equity Value Formula 1 market value of equity I will start with market value of equity is going to be is equal to share
price into number of outstanding shares this is the first Formula know over here
the share price is the last traded price of the stock and the number of shares
outstanding should be at the latest figures available now there is another
formula for this equity value formula the second equity market value formula
is commonly used to find the fair equity value using DCF approach now there is a
thing called enterprise value and equity value so enterprise value basically I’ll
discuss over here enterprise value EV at the very beginning is basically
total assets and there are many other things that are involved and your it
involves your liability shareholders equity net debt and equity value so the
equity value in this particular scenario is going to be equity value is equal to
enterprise value minus the net debt which is your next formula equity value is
going to be your enterprise value EV – your net so we use the steps to
calculate the fair equity market value now the first step goes something like
this use a DCF approach a DCF using FCFF
that is of free cash flow to the form DCF will provide us the fair valuation
of the total firms enterprise value the next step is use the formula of the
enterprise value calculating using the DCF we have to calculate over here evey
so that is fair value t plus fair value plus preferred shares plus minority
interest you need to add any outstanding debt and then deduct any cash and bank
balance that will give you your enterprise value then third
we can finally calculate the fair equity value which is equal to enterprise value
that is a EV okay less any preferred shares less any minority interest less
any outstanding debt and you will add back any cash and any bank balance okay
so this is how it is it if we find the fair equity value the target price of
the stock is going to be fair equity value which we found over here divided
by the number of outstanding shares now you need to note that something that
market friends with the stock and the target price of the stock are two
different thing one is called market price another is called target price
they’re two different thing let’s assume that market price of let’s say Apple is
$110 per share using DCF you may get a target price of Apple close enough to
let’s say 135 this means that Apple is basically undervalued this means you
know it hasn’t reached the price of 135 so one should take a pie position in
this now let’s get to the next level equity
market interpretation equity market value is more useful to the seller of a
business than an investor let’s have a detailed look at this let’s say there is
a there is a guy called Mr. A again and he has a company which he wants to sell
so Mr. A is a seller now he is concerned about the valuation
of the company one day while searching for the buyers of his business mister A
got a proposal from mr. B and mr. B said he would buy Mr. A’s business at certain
valuation mr. B gave mr. a he mentioned that he has taken some loan for his
business which has not been fully paid yet and mr. B say that then he would be
the same as the valuation he has calculated however there is this mr. a
is saying that he will only receive the money after payment of the debt and
that’s market value of equity in the actual sense let’s understand this in
numbers let’s say mr. B say that he would pay 10 million for Mr. A’s
business before knowing that Mr.A has still to pay some debt and mr. A
mentioned that outstanding debt is mr. A mentioned that outstanding debt is let’s
say 2 million so mr. B agreed to pay mr. a 10 million for the business but that
would be inclusive of the outstanding that debt basically that means mr. A
would only get how much it’s going to be 10 minus 28 here the US 10 million
dollars is the enterprise value and 8 million is the equity market value so
let’s do a final basic example on this and we’ll read will conclude on this let
us do a basic value example of comparing two companies on the basic equity market value and finding the larger one let’s say there are two companies this company A it has Company B there are some shares they have and market price let’s say
there are 30,000 shares over here and 50,000 shares over here the market price
is let’s say over here 100 and over here 90 so in this case we have
given both the numbers of outstanding shares in the market price of the shares
let’s calculate the equity market value of the company a and Company B so the
equity market value of the company is going to be as simple as that
shares into the market price control R and
there we go we have our answer three 3,00,000 and 4,50,000 right so
basically what we we note that the market value of the equity of company a
is is basically more than Company B but let’s tweak few things and
calculate enterprise value and let’s see you know how it turns out to the
investor so based on this we can make some find the conclusion in the final
analysis it can be say that equity market value is the best method if an
owner of a business wants to know how much he would get by selling his
business from investor point of view enterprise value will fit the pin so
that’s it for this particular topic if you have learned and enjoyed watching
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About Ralph Robinson

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1 thought on “Equity Value (Definition) | Formula | Example & Calculation

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