Implied Share Price Formula Explained for Investors

Key Takeaways

• The implied share price formula estimates what a share should be worth based on the company’s total value and outstanding shares.
• Implied share price can differ from market price, especially in M&A scenarios or when valuing private companies.
• It is often calculated using enterprise value or equity value, then dividing by the number of common shares.
• The difference between equity value and enterprise value is crucial in understanding who benefits—shareholders or all investors.
• Implied value plays an important role in financial modeling, investor decision-making, and deal negotiations.

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.

Why the Implied Share Price Matters to Investors

The implied share price plays a critical role in helping investors:

• Determine whether a stock is overvalued or undervalued.
• Assess the potential return of an investment based on its fundamentals.
• Understand the impact of strategic decisions, such as debt issuance, buybacks, or M&A.
• Evaluate fairness opinions in transactions involving premiums over current market price.

It also acts as a benchmark when negotiating deal terms, particularly for acquisitions and financing rounds.

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.

Implied Share Price vs. Market Price

While the market price reflects the value investors are currently willing to pay, the implied share price reflects what a share is theoretically worth based on valuation models.

Key differences:

Understanding this distinction helps investors spot overvalued or undervalued securities.

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.

Implied Share Price Formula Variations

There are several ways to arrive at an implied share price depending on the purpose and available data:

1. Using Equity Value: The implied share price is calculated by dividing the company's equity value by the total number of outstanding shares.

2. Using Enterprise Value: First, calculate equity value from enterprise value:

Equity Value=Enterprise Value−Net Debt−Preferred Equity−Minority Interest

Then apply the equity value in the first formula.

3. Based on Future Cash Flows: In discounted cash flow (DCF) models, future cash flows are projected and discounted back to present value. That value becomes the basis for implied equity value, which is then divided by the number of shares.

Each variation provides insights under different assumptions—market-based, transaction-based, or intrinsic valuation models.

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.

When to Use the Implied Share Price Formula

The implied share price formula is especially useful in scenarios where no current market price exists or when assessing a fair value during negotiations. Common use cases include:

• Private company valuations where no public trading price is available.
• Mergers and acquisitions, to determine what buyers may be willing to pay per share.
• Initial public offerings (IPOs), where the implied price helps set an initial trading range.
• Investor due diligence, especially when comparing companies or evaluating growth potential.

In these contexts, the implied share price formula offers a theoretical price that can guide strategic decision-making.

Frequently Asked Questions

1. What is the implied share price formula?
   The implied share price is typically calculated by dividing the equity value of a company by the number of outstanding shares.
2. How is implied share price different from market price?
   Implied share price is model-based, while market price is driven by current trading activity.
3. Why is implied share price important in M&A?
   It helps buyers and sellers determine a fair value per share, especially when premiums or control stakes are involved.
4. Can the implied share price be used for private companies?
   Yes. It’s one of the few ways to estimate per-share value in the absence of a public stock price.
5. How do enterprise value and equity value affect the implied share price?
   Enterprise value represents the total firm value. Subtracting liabilities (like debt) leads to equity value, which is used in the share price formula.

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