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If a company has $80 million in equity and $20 million in debt, this means that total firm value = D + E = $100 million.

Am I then right to assume that if there are 1 million shares outstanding, then each share is worth $100? Or, do I have to subtract the $20 million debt from the equity, leaving the firm value to be $60 million, then each share is worth $60?

Can someone please help me out? Thanks.

6

There is no formula for calculating a stock price based on the financials of a company. A stock price is set by the market and always has a component built into it that is based on something outside of the current valuation of a company using its financials.

Essentially, the stock price of a company per share is whatever the best price it can get on the open market.

If you are looking at how to evaluate if a stock is a good value at the current price, then look at some of the answers, but I wanted to answer this based on the way you phrased the question.

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Adding assets (things owned) and liabilities (debt) never gives you anything useful. The value of a company is its assets (including equity) minus its liabilities (including debt).

However this is a purely theoretical calculation. In the real world things are much more complicated, and this isn't going to give you a good idea of much a company's shares are worth in the real world

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  • I think assets-liabilities is the book value, not the company value. I believe the company value is the value the market has for it, which is the market capitalization. – Timothée HENRY May 9 '12 at 13:21
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    If the questioner is asking whether they should add assets and liabilities together, then the difference between book value and market capitalization is far too advanced for them. – DJClayworth May 9 '12 at 13:55
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    Assets and equity are not synonymous. Assets - Liabilities = Equity. Refer to Wikipedia - Accounting equation Assets are backed by either debt, or equity. Suggest you clarify your answer. – Chris W. Rea Jun 22 '12 at 13:01
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I'll give you my quick and dirty way to value a company:

  1. calculate equity = assets - liabilities (also called "book value")
  2. check profit (net income)

A quick and dirty valuation could be: equity + 10 times profit. This quick way protects you from investing in companies in debt, or losing money.

To go more in-depth you need to assess future profit, etc.

I recommend the book from Mary Buffett about Warren Buffett's investing style.

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