Market Capitalisation

Market capitalisation has caught me out quite a few times in the past. Its obviously one of the most important figures if you are trying to get a grasp on the fundamentals.

What's the difference between market cap. & fully diluted market cap.?

If a company is listed on the ASX and a foreign exchange, does the market cap. allow for these foreign shares?

Do you/analysts include options in your market cap?

Cheers

you would allow for shares listed on a foreign exchange in a market cap calculation

fully diluted market cap allows for exercise of options, a straight market cap does not

probably an oversimplistic answer but the gist of it is correct (until I am corrected )

should have said allows for an exercise of in the money options

Market Cap is actually not that important a figure. What you should be considering is market cap + debt value + any hyrids (convertables etc.) + options

So if a company has a market cap of 10 mill including options issued and debts.

The companys share price is ten cent, if they acquire a project that is worth or will earn them a certain 100M therefore their SP should increase tenfold?

KIWIKARLOS said:

So if a company has a market cap of 10 mill including options issued and debts.

The companys share price is ten cent, if they acquire a project that is worth or will earn them a certain 100M therefore their SP should increase tenfold?

Click to expand...

it has been a long while since I did Business Finance/fundamental analysis at Uni and I will probably stand corrected....market cap is the value the market has placed on the equity in the company, which theoretically is the Net present value of the company. If the company has a market cap of $10m and creates a project worth $100m then the value of the equity increases ten fold and likewise the price assuming the market has valued it correctly (which it may not).

The value of the operational side of the business is termed the "Enterprise Value" [although the EV does take into account financing effects as the debt/equity/other mix affects the Weighted Average Cost of Capital (WACC) i.e. the discount rate]. This is the total value of the business.

That value is divided amongst the firm's debt, equity, and hybrids. The value of the equity is the Enterprise Value minus all the more senior claims to the cash flows of the business (like the debt, preference shares etc.).


An example, to respond to the previous question:
Let's say AAA is worth $100mm, with $20mm of debt and $80mm of equity. AAA acquires a project at no cost which increases the value of the company to $200mm. The value of the debt once issued essentially depends on the risk free rates + the default risk of the company. Assuming that AAA had low default risk when it was worth $100mm, the default risk will be slightly but not significantly (as it is already quite low) lower (assuming the new project is not highly risky..long story). So the debt should still be worth about $20mm. The value of the equity will make up the remainder, being $180mm - so each share will have gone up 125%.


EDIT: This is the 100% theoretical side, of course in reality with fluctuating market prices the actual picture of what's going on is confusng..