4.7: Equity value
The equity value of a company is the value that is funded by the shareholders. In a fair market valuation report, equity value is stated at fair market value, not book value. On the company balance sheet, the equity value is the portion titled Shareholders’ Equity; it includes the book value of the shares and retained earnings.
Equity value in a valuation report thus represents the total fair market value of all the shares classes.
Equity value is the value of all the shares of the company.
Equity value = (Enterprise value + Redundant assets) – (Term Debt + Shareholder loans)
Equity value is calculated by taking the enterprise value (i.e. the operational business) and adding redundant assets and deducting term debt and shareholder loans. Some other adjustments may be required, notably for notional disposition costs (the theoretical cost, to the company, of disposing of its operations. This may include corporate taxes).
The value of the common equity of the company is determined after deducting the preferred shares at their redeemable (or retractable) amounts.
Allocating the fair market value of the equity of a company can become complicated if there is a complex capital structure (e.g. different share classes with different rights).
Contact MVI for assistance in understanding the capital structure of your company and in determining the fair market value of the equity of your company.