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Equity value is defined as the value of a company available to owners or shareholders. It is the enterprise’s value along with 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. There are two methods by which equity value is calculated – intrinsic value method and fair market value method:
- In intrinsic value method, equity value is derived by taking market capitalization value and adding to it the equity value of stock options, the equity value from convertible securities less proceeds from the conversion of convertible securities.
- In the fair market value method, equity value is derived by taking marketing management capitalization value and adding to it the fair value of all stock options calculated by the Black-Scholes formula or a similar method and the value of convertible securities exceeding the value of the same securities without the conversion attribute.
Stock valuation is the method of calculating theoretical values of companies and their stocks. These methods are primarily used to predict future market prices, or more generally potential market prices, and thus to profit from price movement – stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall.
The most common methods used in stock valuation are – Earnings Per Share (EPS), Price to Earnings (P/E), Growth Rate Price Earnings to Growth (PEG) Ratio, Nerbrand Z, Return on Invested Capital (ROIC), Return on Assets (ROA), Price to Sales (P/S), Market Cap Enterprise Value (EV), EV to Sales, EBITDA,EV to EBITDA etc.
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