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Learn/DCF Valuation/Module 2
2.1·6 min read

Equity Value (Market Cap)

Equity value is what the common shareholders own. It's price per share times fully diluted shares - not basic shares.

By the end you can
  • ✓Define equity value and where it comes from
  • ✓Explain why we use fully diluted shares, not basic
  • ✓Compute a simple market cap
Equity value

The value of a company's common shares - what belongs to equity investors after all debt and other obligations. Often called market capitalization ("market cap").

Equity Value=Price per Share×Fully Diluted Shares Outstanding\text{Equity Value} = \text{Price per Share} \times \text{Fully Diluted Shares Outstanding}

The subtlety is in which share count. Using basic shares understates the true ownership base, because it ignores securities that will turn into stock - in-the-money options, warrants, and convertibles. The honest measure is fully diluted shares outstanding (FDSO).

FDSO=Basic Shares+In-the-money Options & Warrants+Convertibles\text{FDSO} = \text{Basic Shares} + \text{In-the-money Options \& Warrants} + \text{Convertibles}
We'll compute each dilutive piece carefully in Module 8.
Where to find it

Basic shares sit on page 1 of the latest 10-K or 10-Q. Dilutive securities (options, their strike prices, convertibles) live in the footnotes to the financial statements.

Worked example · Apple's market cap (illustrative, Apr 2020)
Given
  • •Price per share: $177.04
  • •Shares outstanding: 7.65 billion
Solution
  1. 1.Multiply
    177.04×7.65bn≈$1.354 trillion177.04 \times 7.65\text{bn} \approx \$1.354\text{ trillion}
Answer

~$1.35 trillion of - the value attributable to common shareholders.

Check yourself

Why do we use fully diluted shares rather than basic shares to compute market cap?

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The One Formula Behind Everything
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Enterprise Value & the Bridge