Valuation Determining A Company’s Worth: Comparing Companies To Determine Value

This lesson discusses how to determine the value of a business by looking at the stock market and comparing it to other similar businesses. By multiplying the outstanding shares with the stock price, one can calculate the value of the equity of the company. For instance, assume a lemonade stand company has 1500 outstanding shares and is worth $30,000 by multiplying 1500 by $20 per share. To raise $4,000, the company can sell 200 of its shares. However, selling shares in the market would reduce the company’s ownership percentage, necessitating a board of directors to represent the shareholders’ interests. Although an IPO would make the stock liquid, it would limit the company’s flexibility as it would have to consider the shareholders’ interests. Overall, the lesson aims to provide an understanding of investing in a business, whether it is a lemonade stand or a company on the stock market.