Why is market cap / equity value useful?
As I understand, when a company goes public, they only issue a piece of the company to be listed for sale publicly (could be lower than 10% of the actual company).
So, for ex in the case of D&B (PLAY) who went public in 2012, they raised $94mm issuing 5.88mm shares. This is obviously well below what the actual company is worth, which is even less than a years revenue for them.
What usefulness is market in determining the total value of the company if the company only has 10% of itself listed publicly? That doesn't seem like a fair assessment of what the company is actually worth, considering that not all companies listed are 100% listed, or even majority listed on the stock exchange.
I just can't see how or why we are only valuing the publicly listed portion of the company and acting as if it's representative of the entire company?
Does market cap include all shares of the company, rather than just the public float? What usefulness is the public float - if a company lists 10% of itself publicly, and I purchase the entire lot of shares, do I now only own 10% of the company, or am I considered an owner of the company? Unsure how this would work in stealth takeovers where PE firms buy up all the public shares - do the shares need to comprise >50% of the company in that case when that happens?
Sorry for the uninformed question - I'm just a freshman and interested in this before classes start.
Thanks
short answer, yes. mkt cap is how the market values 100% of the company, not just a slice
bump
when you buy 1% of something you're gonna pay 1% of what you think the whole thing is worth.
I guess my question is when you calculate market cap, does "shares outstanding" compromise every owner of the business? VC firms, insiders, publicly listed stock, restricted stock, owners who bought in before the company went public?
If the usual "shares outstanding" DOES include this, then why do some firms only calculate market cap using public float and ignore every other beneficial owner of the company? Seems like you would arrive at a fairly low-ball figure if you just ignore all other additional owners of the company...
Thanks
market cap includes all common shares, including those not in public float
Dumb question, but how can you determine what % ownership of the company is actually publicly listed.
Why calculate equity value? (Originally Posted: 11/02/2014)
Heys guys, quick question regarding equity value versus enterprise value. Since enterprise value is a better representation of the economic cost of buying a company out, is there ever a situation in which investment banker would want to just calculate the equity value of a firm?
The only thing I can think of is that when dealing with a PE firm (LBO) you would want to calculate levered cash flow and do an equity valuation because the PE firm is obviously buying the equity of the company. Appreciate any insight into this. Thanks!
Based on your question, I presume you have never worked in IBD?
A lot of times you calculate/do stuff, it's just because that's the way it is. If you already have equity value, it's just automatic that you calculate the EV - regardless of whether you need the EV figure later on.
The debt, the excess cash (inputs for EV), goes into your sources and uses of fund in your LBO anyway.
You also need to calculate equity value in the context of an acquisition (ie including a control premium)....the enterprise value you see on things like yahoo finance doesn't include the control premium an acquirer would have to pay for the company, so in the context of acquisitions etc. you don't actually have EV unless you calculate the relevant equity value first.
I've needed it when I was asked for an implied share price.
Because equity value is the amount attributable to equity shareholders. Those shareholders are the clients for sell side IB, so don't you think they would want to know what they will expect in the form of compensation from a sale (or other strategic alternative)?
Good call - Appreciate this. Thanks.
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