The Market Value of a company’s common equity is a function of the most recent price paid by investors in the open markets to purchase a share and the total number of diluted shares outstanding.
The market value of equity—or market capitalization (“market cap”)—is calculated by multiplying the latest closing share price of a company by its total number of diluted shares outstanding.
The market value, or “market capitalization”, is the fair value of a public company’s common equity, which can be expressed as a standalone metric or on a per-share basis.
The market value of an underlying asset—the shares issued by a publicly traded company that represents partial ownership in the issuer’s common equity—depicts not only the general perception by the financial markets of how much each share is worth but also the actual prices paid.
That said, the share price of a company is ultimately set by market participants who engage in transactions in the open markets.
Thus, the market value per share fluctuates based on the current conditions and certain forward-looking factors, such as investor sentiment regarding the company’s outlook, the developing industry or secular trends of relevance, and the market’s perception of company fundamentals (e.g. profit margins, growth prospects, risk profile).
External factors like current market conditions and the economic outlook (e.g. fear of recession, Fed interest rate policy predictions) can also cause a company’s share price to fluctuate, which are out of the direct control of the company.
Current share prices can be readily observed in real-time via market data resources and news outlets such as Bloomberg, the Wall Street Journal (WSJ), and CNBC.
The formula to calculate the market value of equity is the market value per share multiplied by the total number of diluted shares outstanding.
When calculating the market cap, the common share count should be determined on a fully diluted basis, which refers to the inclusion of the effects of potentially dilutive securities like options, warrants, and convertible debt instruments.
In practice, the treasury stock method (TSM) is used to estimate the fully diluted share count.
The market value per share can be derived by rearranging the formula.
The market value per share, or equity value per share, is equal to the market capitalization divided by the total number of diluted shares outstanding.
In short, the market value per share reflects the stock price of a company at present.
One common use case for manually calculating the market value per share would be if the market capitalization were also calculated manually in a discounted cash flow model (DCF), as opposed to pulling the figure directly from a third-party resource.
The calculated market value per share can be compared to the actual share price to determine whether the company’s shares are currently undervalued, overvalued, or priced fairly by the market.
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The book value of equity and market value are often expressed on a per-share basis.
The book value of equity (BVE) is the historical value of a company’s common equity recorded for purposes of bookkeeping, whereas the market value is more indicative of the current value of the company’s common equity based on recent transactions.
We’ll now move on to a modeling exercise, which you can access by filling out the form below.
Suppose a public company’s shares are trading at $18.00 as of the latest closing date.
To estimate the intrinsic value of the company, you’ve built a DCF model in which the implied market value came out to be $20 billion.
Using the treasury stock method (TSM), the company’s common share count is one billion on a fully diluted basis.
By dividing the $20 billion in equity value by the 1 billion in total diluted shares, the implied share price is $20.00 per share.
The actual market value per share is implied to be trading at a 10% discount relative to the DCF-derived share price. The difference in the current share price and the manually calculated market value per share is attributable to the discretionary assumptions used in the DCF model.
In the next step, we’ll quickly reverse the calculation by multiplying the estimated market value per share by the total diluted share count.
The market value we arrive at is $20 billion, which was our initial assumption.
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