Equity value

Equity value is a market-based measure of the equity value of a firm. It is also called Diluted Earnings Per Share or Earnings per share (EPS). EPS is, in basic terms, the company's revenue minus all costs including paying interest on debt and paying taxes divided by the company's number of shares – giving rise to an investor's ability to calculate a P/E multiple which in simple terms is the company's equity value or market value or market capitalization (whatever you want to call it – the value that goes to all the stockholders or owners of equity) divided by the company's number of shares, all divided by the company's total earnings, or net income, divided by its number of shares. It accounts for all the ownership interest in a firm including the value of unexercised stock options and securities convertible to equity.

From a mergers and acquisitions academic perspective, equity value differs from market capitalization or market value in that it incorporates all equity interests in a firm whereas market capitalization or market value only reflects those common shares currently outstanding.

Calculating Equity Value

Equity value can be calculated two ways, either the intrinsic value method, or the fair market value method. The intrinsic value method is calculated as follows:

Equity Value = Market capitalization + Amount that in-the-money stock options are in the money + Value of equity issued from in-the-money convertible securities - Proceeds from the conversion of convertible securities

The fair market value method is as follows:

Equity Value = Market capitalization + fair value of all stock options (in the money and out of the money), calculated using the Black-Scholes formula or a similar method + Value of convertible securities in excess of what the same securities would be valued without the conversion attribute

The fair market value method more accurately captures the value of out of the money securities.