Question

Assume two approaches to valuation : (1) value the equity in the firm and (2) value the entire firm. What is the distinction? Why does it matter?

Answer 1

Value of equity in the firm - It means value of equity of a firm. A firm consist of genrally debts and equity. So the companys value is divided into 2 parts one is debt and other is equity. Value of equity consist of sharholders value in the firm only. Value of debt is the value of all debt including long term debt, short term debt and minority interest. Value of firm is the total value of equity and debt. Value of firm is the total value of assets including cash

The distinction between value of equity and value of firms

1) value of firm gives the total current value of bussines, in short it is a synopsis of balance sheet value. On the other hand value of equity is the snapshot of current and potential future value.

2)value of firm caluculates both value of equity and value of debt. Whereas value of equity is the value of enterpises reduce by debt .

3) value of equity is genrally used in stock market to purchase the stock by genrall investors whereas value of firm is genrally considered in purchasing controlling stake or in merger or acquisitions.

It genrally matters on the basis of situation . Value of firm is gerally matters by the management team on evaluating their performance. The balance of debt and equity understanding and finding out the market cap.

On the other hand value of equity is genrally matters to the shareholders in understandong the price of stocks. Value of equity determines the reserves of the company. It helps in determing whether the stock is overvalued or undervalued in open market.