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Types of Private Equity Financing
VCs provide most private equity financing in return for an early minority stake.
- LBOs: look to hit big early on and exit investments within five to seven years
- Private Investment in a Public Company (PIPE): buyout of stock in a company at a discount to the current market value (CMV) per share to raise capital.
Shareholders’ Equity = Total Assets−Total Liabilities
The following formula and calculation can be used to determine the equity of a firm:
- Shareholders’ Equity = (Total Assets + Total Liabilities) / (Decrease in value of treasury shares)
- Locate the company’s total assets on the balance sheet, then locate total liabilities, then subtract from total assets to arrive at shareholder equity.
How Is Equity Used by Investors?
Equity is an important concept for investors
- Investors use shareholders’ equity as a benchmark for determining whether a particular purchase price is expensive
- An investor might feel comfortable buying shares in a relatively weak business if the price they pay is sufficiently low relative to its equity
Other Terms Used to Describe Equity
Other than shareholders’ equity, book value, and net asset value, other terms that are sometimes used include:
What the Components of Shareholder Equity Are
Retained earnings are part of shareholder equity and are the percentage of net earnings that were not paid to shareholders as dividends
- Think of retained earnings as savings since it represents a cumulative total of profits that have been saved and put aside or retained for future use
- Companies may repurchase stock when they cannot deploy all of the available equity capital
Other Forms of Equity
Equity can be defined as the degree of ownership in any asset after subtracting all debts associated with that asset.
- Common variations of equity include: a stock or any other security representing an ownership interest in a company, real estate, and when a business goes bankrupt, equity is the amount of money remaining after the business repays its creditors
What is Equity?
Commonly referred to as shareholders’ equity, it is the amount of money that would be returned to a company’s shareholders if all assets were liquidated and all of the company’s debt was paid off in the case of liquidation.
- Equity can sometimes be offered as payment-in-kind, and is one of the most common pieces of data employed by analysts to assess companies’ financial health.
Equity is equal to total assets minus its total liabilities
For a homeowner, equity would be the value of the home less any outstanding mortgage debt or liens
- 77% of retail CFD accounts lose money
- Investopedia requires writers to use primary sources to support their work
- These include white papers, government data, original reporting, and interviews with industry experts
How Shareholder Equity Works
By comparing concrete numbers reflecting everything the company owns and everything it owes, the “assets-minus-liabilities” shareholder equity equation paints a clear picture of a company’s finances
- Equity is used as capital raised by a company, which is then used to purchase assets, invest in projects, and fund operations
- Shareholder equity can be positive or negative
- Positive: the company has enough assets to cover its liabilities
- Negative: company’s liabilities exceed its assets
Home Equity
Equivalent to the value contained in homeownership
- The amount of equity one has in their residence represents how much of the home they own outright by subtracting from the mortgage debt owed.
- Equity on a property or home stems from payments made against a mortgage, including a down payment and increases in property value.
Brand Equity
Measure the value of a brand relative to a generic or store-brand version of the product.
- Negative brand equity occurs when people will pay more for a generic product than a brand name due to bad publicity such as a product recall or a disaster.
Private Equity
Private equity generally refers to an evaluation of companies that are not publicly traded
- The accounting equation still applies where stated equity on the balance sheet is what is left over when subtracting liabilities from assets, arriving at an estimate of book value
- Privately held companies can then seek investors by selling off shares directly in private placements
Example of Shareholder Equity
Exxon Mobil Corporation (XOM)
- Total assets were $354,628, total liabilities were $157,797, and total equity was $196,831
- The accounting equation for shareholder equity is as follows: (Total Assets) – (Total Liabilities) + (Total Equity) = (Shareholder Equity)
Equity vs. Return on Equity
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholder equity.
- It measures how effectively management uses a company’s assets to create profits.
- ROE could be considered the return on net assets.
What Is Equity in Finance?
Equity is an important concept in finance that has different specific meanings depending on the context.
Key Takeaways
Equity represents the value that would be returned to a company’s shareholders if all assets were liquidated and all of the company’s debts were paid off
- Think of equity as a degree of residual ownership in a firm or asset after subtracting all debts associated with that asset
- Home equity is the value of a homeowner’s property
