How to Calculate Price Per Share of Equity
To understand how to calculate price per share of equity, you need to first understand what the book value of equity per share (BVPS) is.3 min read
2. How Is Book Value of Equity Per Share Calculated?
3. Why Understand Book Value of Equity Per Share?
4. Increasing Book Value of Equity Per Share
To understand how to calculate price per share of equity, you need to first understand what the book value of equity per share (BVPS) is and how that relates to a company's true value or worth, or its book equity.
What Is Book Value of Equity Per Share?
Book value of equity per share refers to the available equity for a company's shareholders divided by all of the shares that are outstanding. The resulting dividend gives you the lowest value of that business's equity. The equity that's available to common stockholders differs from that which is available to preferred stockholders. To find the amount of equity that is available to common stockholders, you'll need to subtract the preferred stock amounts from the total equity available to all shareholders.
Shareholder equity is what is available to stockholders in the company once the company's debts have all been paid. A business cannot distribute profits to shareholders if it is not in good standing with all of its business loans and debts. To find out if there is equity left in the business to offer to shareholders, you can subtract the business's debts and liabilities from its total assets. This number is called the company's book value.
Many think that the value of a company lies only in its profits, but the true value considers its debts as well. Book value of equity per share takes the book value of a company and calculates what that equals per share available to shareholders.
A business's retained earnings refers to its net income left over after the dividends are paid to shareholders. The paid-in capital of a company is its total value of issued and outstanding stock added to any excess amounts from investors minus all costs of issuing stocks.
How Is Book Value of Equity Per Share Calculated?
In order to properly calculate the book value of equity per share for your company, you can use a helpful program like Microsoft Excel. You'll need to follow these steps:
- Calculate the book value of the company.
- Count up all of the company's outstanding shares.
- Divide the company's book value by the total number of shares.
The quotient will give you the price per share of equity, also called the book value of equity per share. For example, if a business's book value is $80 million and it has 5 million outstanding shares, the price per share of equity is $16. This formula can be used for both preferred and common shares. If a business offers preferred shares, the price per share should first be calculated for those shares before calculating common shares. Common share values only consider the equity leftover after preferred shares.
Why Understand Book Value of Equity Per Share?
Many investors will use BVPS to find out if a certain stock price is accurate. Sometimes stocks are undervalued. An investor can compare the BVPS of a stock to its market value and see how they compare. If the stock's BVPS is higher than its market value or current share price, then the share is undervalued. The higher a stock's BVPS, the more valuable it is.
Also called balance sheet insolvency, a negative book value means that a business's liabilities outweigh its assets. So, an investor will want to keep an eye out for this issue while looking at possible stock options. You never want to buy stock that's overvalued.
Increasing Book Value of Equity Per Share
There are two ways to increase a company's BVPS. First, generating higher profits is always the most straightforward way to build equity in your business. When profits are used wisely, they lead to higher equity. Businesses should spend their money on attaining assets and reducing their liabilities, which generates more equity.
Second, a business can increase its BVPS by repurchasing its common stock from common stockholders. The less outstanding stock a company has, the higher the value of that stock. For instance, if the previously mentioned company with a book value of $80 million and 5 million shareholders, bought back 1 million shares, their price per share, or BVPS, would raise from $16 to $20 per share.
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