Valuation: The Market Approach

Chapter 5

Market Value of Equity vs. Market Value of Operating/Invested Capital

What is to be valued: the equity capital or the operating/invested capital?

5.1 MARKET VALUE OF EQUITY

The equity market value or, alternatively, the market value of all outstanding shares (the market capitalization for companies listed on a stock exchange) is generally represented by the letter P (Price).

5.2 MARKET VALUE OF OPERATING/INVESTED CAPITAL

The market value of operating capital or, alternatively, the market value of invested capital, refers to the market value of the business operations as a whole (i.e. the entire capital structure, not just the market value of the equity as above), and so represents the value of the business enterprise in its entirety.

When applying the market approach, the market value of operating/invested capital is usually expressed using one of the following three terms: EV (enterprise value), MVIC (market value of invested capital) or PA (price assets). Consequently, when the enterprise value (i.e. the EV) of a company is referred to here, it refers to the market value of its operating/invested capital. Figure 5.1 illustrates the link between the market value of operating/invested capital, i.e. the enterprise value, on the asset side and the market value of operating/invested capital, i.e. the enterprise value, on the liability side (note: from now on, the terms “operating capital” and “invested capital” are interchangeable).¹

Figure 5.1 Enterprise value (i.e. market ...