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Assume two approaches to valuation: (1) value the equity in the firm and (2) value the...

Assume two approaches to valuation: (1) value the equity in the firm and (2) value the entire firm. What is the distinction? Why does it matter?

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Answer #1

Equity value

The equity value (or net asset value) is the value that remains for the shareholders after any debts have been paid off.

FORMULA FOR CALCULATING EQUITY VALUE: SHARE PRICE * NUMBER OF SHARES OUTSTANDING

VALUATION OF ENTIRE FIRM

The enterprise valueis the total value of the assets of the business.

FORMULA FOR CALCULATING VALUE OF ENTIRE FIRM:EQUITY VALUE+TOTAL DEBT-CASH

VALUATION OF ENTIRE FIRMis more commonly used in valuation techniques as it makes companies more comparable by removing their capital structure from the equation . Also it’s much more common to value the entire business (enterprise value) when advising a client on an M&A process.

Equity valuation is useful for investors, as the investors have to buy shares indevidually and not the entire business.

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