Valuation : Question 18
It seems that I'm confused with the terms: value of equity, shareholder's equity, and market capitalization. Could you explain the differences and what to use for valuation?
in fact there are 2 things
on one side you have equity on the balance sheet which is an accounting concept corresponding to cash brought to the company by shareholders plus net income carried forward ( the part of net income which is not paid out as dividends to shareholders)
on the other side you have the value of this equity, ie the price at which investors are ready to buy or sell it, which is a financial concept
value of equity can be computed ( using an intrinsic method suc as DCF or comparable methods) or observed if the company is listed on a stock exchange. In this case the observed market value of equity is the share price times the number of outstanding shares, and this is called the market capitalisation ( sometimes we add " of equity" or say equity market capitalisation)
on one side you have equity on the balance sheet which is an accounting concept corresponding to cash brought to the company by shareholders plus net income carried forward ( the part of net income which is not paid out as dividends to shareholders)
on the other side you have the value of this equity, ie the price at which investors are ready to buy or sell it, which is a financial concept
value of equity can be computed ( using an intrinsic method suc as DCF or comparable methods) or observed if the company is listed on a stock exchange. In this case the observed market value of equity is the share price times the number of outstanding shares, and this is called the market capitalisation ( sometimes we add " of equity" or say equity market capitalisation)