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Equity Value Formula

Equity Value Formula

Table of Contents

  • What is Equity Value Formula?
  • Examples
  • Relevance and Use

What is Equity Value Formula?

The term “equity value” refers to the value of the company that is due to the Equity shareholders. It can also be seen as the total value that the shareholders have made available for the business.

There are two methods to calculate equity value.

Equity Value Formula #1

In the first method, the calculation of equity value formula is done by multiplying the market value per share and the no. outstanding equity shares of the company.

The formula is represented as,

Equity Value Formula = Market value per share * No. of outstanding of equity shares
The above equity value is also called as market capitalization.

Equity Value Formula #2

This second equity market value formula is commonly used to find the “fair equity value” (using DCF Approach)

Enterprise Value Vs Equity Value Diagram

In this process, the first step is to find the total enterprise value of the firm using the DCF approach.

Once you have the Enterprise value, you can apply the following formula to calculate equity value

Equity Value Formula= Enterprise value – Preferred stock – Minority interest – Net debt + Cash & cash equivalents

Steps to Calculate Equity Value using Formula #1

In the first method, the calculation of equity value equation can be done by using the following steps:

  • Step 1: Firstly, determine the market value per share of the company from the stock market.
  • Step 2: Next, determine the no. of outstanding shares from the balance sheet of the company.
  • Step 3: Finally, the calculation of equity value equation of the company is done by multiplying the market value per share and the outstanding no. of outstanding equity shares.
    • Equity Value Formula = Market value per share * No. of outstanding equity shares

Steps to Calculate Equity Value using Formula #2

In the second method, the calculation of equity value equation can be done by using the following steps:

  • Step 1: Firstly, figure out the enterprise value of the company by referring to any reliable third party valuation.
  • Step 2: Next, the value of the preferred stock is calculated by multiplying the no. of outstanding preference shares and par value of the preference shares. The value of preference shares can also be collected from the balance sheet.
    • Preferred stock = Par value * No. of outstanding preference shares
  • Step 3: Next, the net debt balance is computed by adding various financial liabilities like bank loans and corporate bonds. These data are again available in the balance sheet.
  • Step 4: Next, the minority interest, if available, is noted from the balance sheet.
  • Step 5: Next, determine the cash & cash equivalents by summing up cash balance, current account deposits, fixed deposits etc. These are also available in the balance sheet as a line item.
  • Step 6: Finally, the calculation of equity value equation is done by adding enterprise value to cash & cash equivalents and then deducting the net debt, preferred stock and minority interest as shown below.
    • Equity Value Formula = Enterprise value – Preferred stock – Minority interest – Net debt + Cash & cash equivalents

Examples of Equity Value Formula (with Excel Template)

Let’s see some simple to advanced examples to understand the calculation of the equity value equation better.

Equity Value Formula – Example #1

Let us assume that a company XYZ Ltd has provided the following financial information for equity valuation and the market value per share:

  • No. of outstanding equity shares = 2,000,000
  • Enterprise value (as per DCF): $8,000,000
  • Net Debt:  $3,000,000
  • Cash & Cash equivalent:  $1,000,000

Below is data for calculation of equity valuation and the market value per share of company XYZ Ltd 

Equity value formula eg1

Based on the above formula, the calculation of the equity value of XYZ Ltd will be as follows

Equity value formula eg1.1png

Equity value = Enterprise value (DCF) – Preferred stock – Minority interest – Net debt + Cash & cash equivalents

Equity value = $8,000,000 – $0 – $0 – $3,000,000 + $1,000,000

Equity value formula eg1.2png

Equity value of XYZ Ltd = $6,000,000

Therefore, market value per equity share can be calculated as,

Equity value formula eg1.3png

Equity value = Market value per share * No. of outstanding equity shares

$6,000,000 = Market value per share * 2,000,000

Equity value formula eg1.4png

Fair Market value per share = $3

Therefore, equity value and Fair Market value per share of XYZ Ltd stood at $6,000,000 and $3 respectively.

Equity Value Formula – Example #2

Let us take the example of Apple Inc.’s annual report as on September 29, 2018. The following information is available:

  • Enterprise value = $1,161,961 MnGiven,
  • Preferred stock = $0
  • Net debt = $11,964 Mn+ $102,519 Mn = $114,483 Mn
  • Minority interest  = $0
  • Cash & cash equivalents = $25,913 Mn

Below table shows data for calculation of Apple Inc.’s annual report as on September 29, 2018

Equity value formula eg1.6png

First, we will calculate the Net Debt

Therefore, Net Debt will be

Equity value formula eg1.5png

Net debt = $11,964 Mn+ $102,519 Mn = $114,483 Mn

Based on the above formula, the calculation of Equity value of Apple Inc. will be,

Equity value formula eg1.7png

Equity value = Enterprise value – Preferred stock – Minority interest – Net debt + Cash & cash equivalents

Equity value Apple Inc. = $1,161,961 Mn – $0 – $0 – $114,483 Mn + $25,913 Mn

Equity value formula eg1.8png

Equity value Apple Inc. = $1,073,391 Mn

Therefore, Apple Inc.’s equity value as on September 29, 2018 stood at around $1,073,391 million or $1.07 trillion.

Relevance and Use of Equity Value Formula

It is very important to understand the concept of equity value formula from an investor’s point of view because it represents the market value of one’s investment stake in a company. As such, the shareholders of a company are generally interested in the equity value of the company. For healthy companies, equity value far exceeds book value as the market value of the company’s shares appreciates over the years.

It is also utilized by investors to measure a company’s size for classification as small cap, mid cap and large cap as mentioned below:

  • Companies with an equity value of less than $2 billion are known small capitalization or small cap.
  • Companies with an equity value of more than $2 billion and less than $10 billion are known as medium capitalization stocks or mid-cap.
  • Companies with an equity value of more than $10 billion are known as large capitalization or large cap.

You can download this Equity Value Formula from here – Equity Value Formula Excel Template

Recommended Articles

This has been a guide to Equity Value Formula. Here we discuss how to calculate Equity value using practical examples along with downloadable excel templates. You may learn more about Financial Analysis from the following articles –

  • Equity Value vs Enterprise Value – Compare
  • Intrinsic Value Calculation
  • Fair value vs Market value – Compare
  • Enterprise Value Formula

The post Equity Value Formula appeared first on Learn Investment Banking: Financial Modeling Training Courses Online.



This post first appeared on Free Investment Banking Tutorials |WallStreetMojo, please read the originial post: here

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