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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.

3 Answers 3

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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. May 9, 2012 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. May 9, 2012 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. Jun 22, 2012 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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