How to calculate the market value of equity

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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.

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Business Valuation

Problems with the Market Value of Equity

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

  • 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. For example, a product failure at one company that leads to a customer’s death could be extrapolated by investors to cover every other competitor in the industry, leading to a general decline in share prices. 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.

Terms Similar to the Market Value of Equity

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