Finance: Stock Valuations and Derivatives
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Description: This course introduces the fundamentals of corporate finance viewed from the perspective of the business manager. Once the course is completed, you will have learned company enterprise valuation method, stock valuation, fundamental and technical analysis, and option valuation. This course features dynamic and engaging video with audio narration, infographics and short quizzes to test your knowledge
Background: The goal of company valuation is to give owners, potential buyers and other interested stakeholders an approximate value of what a company is worth.
Due to the financing of a company by debt and equity, valuation techniques that focus on share deals either value the equity, resulting in the equity value (Eq. V.) or the total liabilities, stating the enterprise value (EV) or firm value (FV). The enterprise value is calculated by the following formula:
Enterprise Value = Market Capitalization +Debt +Preferred Share Capital + Minority Interest - Cash
and cash equivalents
Let’s discuss these components individually and the reasons why they are included in the calculation of enterprise value.
Market Capitalization:
Is the market value of common shares of a company. It is calculated by multiplying the current market price per share by the total number of equity shares of the company.
Debt:
Includes the bonds and bank loans. Items such as trade creditors are not included. Once a business is acquired, its debts become the responsibility of the acquirer. The acquirer will have to repay the debts from the cash flows of the business; therefore, they are added to the calculation of enterprise value.
Preferred Shares:
Redeemable preferred shares are in substance debt. They are debt to all intents and purposes.
Therefore, the existence of such preferred shares represents a claim on the business that must be factored into enterprise value (EV).
Minority Interest:
It is a non-current liability that represents the proportion of subsidiaries owned by minority shareholders.
Cash and Cash Equivalents:
Cash equivalents are investments that can be readily converted to cash. Common examples of cash equivalents include commercial paper, treasury bills, short term government bonds, marketable securities, and money market holdings.
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