Market Capitalization Vs Equity Value

In this article, we will discuss about the Market capitalization and Equity value of company in detail. Let’s explore Market Capitalization Vs Equity Value

First of all, we are discussing about the Market Capitalization of company:

Market Capitalization

All the public companies have their market capitalization, which represent the corporate size of company and their purchase cost of any organisation, in open market. Generally, Market capitalization is used by the investors because the amount of market capitalization is represented the worth of company.  Market capitalization is also known as Market value of Equity. Company’s market capitalization is measured by the total number of shares outstanding and market price of the share. We can also define in equation form:

Market Capitalization = Market price of share x Number of common shares outstandingMarket Capitalization Vs Equity Value

Now, Let’s take an example. If you want to purchase a XYZ Ltd. company on new year and the shares of company at Rs. 50 per share. On the other hand, company has 1 crore number of shares outstanding, then you should have paid the amount of :

Rs. 50 x 10000000 = 50,0000000

Therefore, amount of 50,0000000 is the Market Capitalization of company.

If you want to more details about market capitalization, then we recommend you to visit at our Enterprise value vs Market Capitalization article.

Well, after discuss about the Market capitalization of company, we explain in detail about the Equity Value of company:

Equity value

Equity value refers to the value of company which represent to owners or shareholders of companies. It is available for them. It is an Enterprise value plus short and long term investments, all cash and cash equivalents, and less minority interests and short or long term debt.

Equity value is not similar as market value and market cap because, for reason of mergers and acquisitions, market cap and market value is reflects only current outstanding shares but Equity value is incorporated with all the equity/ownership interests and the value of unexercised stock options, in a firm.

We can calculate the equity value of company by two methods, first one is Intrinsic value method and second is Fair value method. Now, we define these methods in an equation form:

1. By Intrinsic Method:

   Equity value = Market capitalisation + 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.

2. By Fair value Method:

   Equity Value = Market capitalisation + 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.

Post Author: fn007

Leave a Reply

Your email address will not be published. Required fields are marked *