The value of a company is presented as the total discounted value of future profits, where the present value of future profits over n years discounted at an interest rate r. The value of the Company can be ascertained by determining what will happen to the firm's balance sheet if shareholders' wealth is increased and what the firm has to do to its value of equity to increase in value. The shareholder's wealth is indicated on the firm's balance sheet at the end of a business year ( Bargeron et al., 2017, p.188 ). The business activities and transactions that took place within the financial year with a negative and positive impact on the shareholder's wealth are also reconciled in the firm's statement of equity. Since the main objective of all companies is to maximize shareholder's equity, a company may adopt several schemes to increase the value of equity.
Shareholder equity is very crucial in a company's balance sheet since it indicates the disparity between the value of a firm's assets and liabilities. As the shareholder wealth of the Company increases the balance sheet will indicate more assets as opposed to liabilities. As the company grows with time, its stockholder equity will often fall or rise. It is, however, significant to understand what will increase the value of equity of the company.
Delegate your assignment to our experts and they will do the rest.
While alluding to the leverage, one can discern that this occurs in an instance where the business manages to access capital by utilizing its existing assets. The essence of this is based on the idea that it is bound to enable a Company to experience exponential growth at a very fast rate ( Daviet & Monge, 2010, p.1501 ). Leverage ends up being obtained by dividing shareholder`s equity from total debt. Equity of shareholders pertains to the value of stake held by these individuals at the Company. Also, since in the event of liquidation, debt ends up being paid out prior to equity being received an intrinsically lower risk level which is posed by the debt incurred. It would, thus, be plausible to indicate that leverage can make shareholder`s equity better off.
The Company can increase its stockholder equity value by use of its assets. The firm raises capital to purchase assets and utilize the assets to make sales or invest in other projects to increase its returns. A well-managed firm will maximize its assets so that it can be able to operate with less investment in assets. A valuable company is that which can increase its earnings with the same amount of its assets.
References
Daviet, S. and Monge, R., 2010. From ‘evolutionary turn’to ‘Territorial resources’: the new trajectories of innovation in Provence, France. Geography Compass , 4 (10), pp.1497-1512.
Bargeron, L.L., Schlingemann, F.P., Stulz, R.M. and Zutter, C.J., 2017. What is the shareholder wealth impact of target CEO retention in private equity deals? Journal of Corporate Finance , 46 , pp.186-206.
