CHAPTER 7

What Is Value?

The most important question before even getting into valuation techniques is this: What is value? To help answer this question we note there are two major categories of value:

1. Book Value. Book value is the value of an asset or entire business entity as determined by its books, or the financials.
2. Market Value. Market value is the value as determined by the market.

BOOK VALUE

The book value can be determined by the balance sheet. The total book value of a company’s property, for example, can be found under the net PP&E in the assets section of the balance sheet. The book value of the shareholder’s interest in the company (not including the minority interest holder) can be found under shareholder’s equity. Walmart’s shareholder’s equity value of $71, 315 is the book value of its equity to the shareholders.

MARKET VALUE

The market value can be defined by its market capitalization, or shares outstanding times share price. Walmart, which is currently trading at $73.82 and has 3, 365.7MM diluted shares outstanding (see Chapter 1 on diluting shares), has a market capitalization of $248, 459.0 MM. This is Walmart’s market value.

These values represent the equity value of a business. The equity value of a business is the value of the business attributable to just equity holders; that is, the value of the business excluding debt lenders, minority interest holders, and other obligations.

Shareholders’ equity, for example, is a value of the company’s assets ...

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