How to Calculate the Implied Value Per Share

When evaluating a company's performance, investors use the value per share of common equity. Companies must list this value, known as earnings per share (EPS), on earnings statements. Investors also use this number to calculate shareholders' dividends.

The implied value per share depends upon the number of outstanding shares along with net earnings available to shareholders. To determine this amount, complete the following:

  • Calculate the company's preferred dividends.
  • Subtract the preferred dividends from net income.
  • Divide the adjusted net income by the outstanding common shares.

For instance, if preferred shareholders own 10,000 shares, and the company promised fixed dividends of $12 per share, the preferred dividend amount is $120,000. If the company has a net income of $700,000, you would subtract $120,000 from $700,000 to get an adjusted net income of $580,000. Let's say investors own 60,000 common shares. You would divide $580,000 by 60,000 to get $9.67 for the implied value per share.

How to Equate Stock Price to Business Value

You can use revenue, profit, and assets to determine what a business is worth. Publicly traded companies have stocks that trade on the market and have a value determined by the price investors will pay for the stock. To determine the company's value based on stock prices, you can use a few pieces of data.

  • Determine the number of outstanding shares of stock. You can look at the investor relations page on the company's website to find this number.
  • Look up the company's current stock price.
  • Multiply the outstanding shares by the current stock share price. The result is the company's market capitalization or market cap.

How to Calculate a Transaction Value

When a company invests in another business, the transaction value is the overall investment value. If you want to sell part of your business or purchase a stake in another company, you need to know the value of what you're buying and selling.

To calculate the transaction value, complete the following:

  • Find the total outstanding shares purchased. You can find this on the balance sheet.
  • Multiply the outstanding shares by the value of a single share. This gives you the market capitalization.
  • Multiply the percentage, in decimal form, by the market capitalization. This is the value of the transaction. For instance, if the company purchases 10 percent of a company with a market capitalization of $500,000, the result is $50,000.

Calculating the Implied Value Per Share of Common Equity

It's unnecessary to determine the value per share of common equity for publicly traded companies since you can find the market price of their stock. It's more difficult for private companies, since there's a not much of a market for shares.

With some companies, you can take the proposed purchase price and divide it by the number of outstanding shares. You can only use this process if the companies have no outstanding debt or preferred shares. Similar issues arise with preferred stock, because if there are outstanding shares, the deal specifies how shareholders are treated during the buyout bid.

To calculate the implied value per share of common equity, complete the following:

  • Find the buyout amount.
  • Subtract any part of the buyout that goes to stakeholders other than those who have common shares.
  • Divide by the number of outstanding common shares.

Equity Value vs. Enterprise Value

Although both terms relate to the company's value, you can estimate the company value by following these steps:

  1. Subtract the cash flow growth rate from the discount rate.
  2. Divide the cash flow amount by the answer from the previous step.

A company with a higher cash flow has more worth than one with lower cash flow. Same for cash flow growth.

There are other aspects to consider:

  • Current value. This is what the market believes the company is worth.
  • Implied value. This is what you believe the company is worth.
  • Equity value. This is the value of all the company's assets, but only to shareholders.
  • Enterprise value. This is the value of the company's assets to all investors.

As a result, the equity value is important to shareholders, while the enterprise value is vital to equity investors, debt investors, and preferred investors.

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