| Chapter: | Reading | Topic |
Bates Corp. has $100,000 in bonds payable with a fair market value of $120,000. It also has 1,000 shares of common stock issued at $50 per share with a fair market value of $80 per share. What amount represents the corporation's market capitalization?
Market capitalization (market cap) is the amount that an entity is worth based on current market prices. It is the common stock price (ie, current market price) per share multiplied by the total common shares outstanding. Market cap is used by investors to compare the relative size of one company against another; it also helps investors determine what they are willing to pay for the stock.
The current stock market price is used instead of par value because par value is an arbitrary amount printed on the stock certificate at the time of the original issuance. Par value is unrelated to the current value of a share of stock.
Because common stock represents the ownership interest in the company, it is used for this calculation. It represents the value of each share of stock. Debt does not affect the value of equity, so it is not part of this calculation. There are three levels of market capitalization: large cap, mid-cap, and small cap.
The market cap for Bates Corp. is $80,000 ($80 per share × 1,000 outstanding shares). Remember that the value is calculated on equity only and excludes debt.
Things to remember:
Market capitalization (market cap) is the total value of an entity's shares of common stock. It is the current market price per common share multiplied by the total common shares outstanding. Market cap compares the relative size of one company against another and helps investors determine what they are willing to pay for the stock.
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