How to calculate the market value of equity

The market value of a company's equity is the total value given by the investment community to a business. To calculate this market value, multiply the current market price of a company's stock by the total number of shares outstanding. The number of shares outstanding is listed in the equity section of a company's balance sheet. This calculation should be applied to all classifications of stock that are outstanding, such as common stock and all classes of preferred stock.

For example, if a company has one million common shares outstanding and its stock currently trades at $15, then the market value of its equity is $15,000,000.

While the calculation may seem simple, there are several factors that can cause it to poorly reflect the "real" value of a business. These factors are:

  • Illiquid market. Unless a company is not only publicly held, but also experiences a robust market for its shares, it is quite likely that its shares will be thinly traded. This means that even a small trade can alter the share price significantly, since few shares are being traded; when multiplied by the total number of shares outstanding, this small trade can result in a large change in the market value of equity. When a company is privately held, it may be quite difficult to determine a market value for its shares, since no shares are being traded.

  • Sector impact. Investors may sour on a certain industry or the reverse, resulting in sudden changes in the share prices of all companies in an industry. These changes may have a short-term duration, resulting in declines and spikes in share prices that have nothing to do with a company's performance.

  • Control premium. An acquirer should not rely upon the market value of equity when deciding what price to bid for a company, since the current shareholders will want a premium to give up control over the business. This control premium is typically worth at least an additional 20% of the market price of the stock.

Similar Terms

The market value of equity is also known as market capitalization.

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