Shareholder Value Method

In simplest terms, the value of a company or business equals the combined values of its debt plus its equity. In Strategic Finance, the value of the whole firm to both debt and equity holders is called “corporate value;” the value of the equity portion is called “shareholder value”.

In general: this is

(Corporate Value) = “Debt” + Equity

The “debt” portion of corporate value refers to the current value of the firm's total obligations, which include:

  1. Market value of all debt

  2. Underfunded Pension Liabilities

  3. Other Obligations - preferred stock (market value), golden parachutes, contingent liabilities, etc.

    Note:

    You should use he market value rather than the book value of debt because during periods of rising interest rates, market values fall below book values. Using book values overstates the value of the liabilities, thus understates shareholder value. The reverse is true when interest rates are falling.

Corporate Value = Debt + Shareholder Value

where: Debt = Market Value of Debt + Underfunded liabilities + Market value of other obligations

Rearranging the corporate value equation to solve for Shareholder Value:

Shareholder Value = Corporate value - Debt

To determine shareholder value, you first calculate the corporate value, the value of the total firm or business unit.