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Current time:0:00Total duration:4:12

Video transcript

In the last video, we saw that if Ben's Shoe Company's stock prices are trading at $21.50 per share, and if Ben's Shoe Company has 10,000 shares-- and we saw that over here on the left, if it had 10,000 shares. Actually both of the shoe companies have 10,000 shares. Then the market is essentially valuing the equity of Ben's Shoe Company at $215,000, even though the book value of the equity was $135,000. What I want to do in this video is think about what does that mean, or how should we perceive the market's value of the assets of Ben's Shoe Company. Then we can also think about Jason's Shoe Company. So remember, assets are equal to liabilities plus the shareholders' equity. So if all of a sudden the market value of the equity, the market capitalization for Ben's Shoe Company is $215,000, that's the equity part right over here, this is the equity. And the only liability that Ben's Shoe Company had was this $5,000 in accounts payable. So let me show you that right over here, he had this $5,000 in accounts payable, also depicted over there. So the only liability is this $5,000. So the liabilities plus the equity, in the case of Ben's company, is $215,000 plus $5,000. So this piece right over here is $220,000. Now, you might remember from previous videos that the book value of the assets in Ben's company are only $140,000. $20,000 of cash, $100,000 of inventory, $20,000-- this isn't equity, this is equipment, I should call it-- $20,000 of equipment. So The question is, what makes up the gap here, when we think about the market value of the equity? Because remember, this piece right here only adds up to $140,000. But our total assets-- or the market's perception of the total assets of the company-- are essentially what it's willing to pay for the equity plus the liability. So the market is saying that Ben's assets, the assets in that company, are worth $220,000. So what makes the difference? And even better, let's assume that Ben has actually done a good job of saying the market value of his inventory, the market value of his equipment. Well, what the market's saying in this situation-- and this is actually what tends to happen in general, the market value of a company's equity tends to be higher than the book value-- is that this company has some type of intangibles. Things that you really can't put a finger on, or touch, or feel, or hold. But it makes this company's assets-- or this company has more than just the sum of its parts. There's more to this company than just the equipment, the inventory, and the cash. It might be Ben's management expertise. It might be a certain way they have of doing business. It might be a certain location they have. It might be their assortment. Who knows what it has, but the market is saying that the combination of this plus all of the expertise and how the business is organized means that it actually has more assets than are on the books. And the same thing is true of Jason's company, when they assign a $120,000 market cap there. This is the $120,000 in equity-- market value of equity. He has another $105,000 in liabilities. So the market's valuing their equity plus liabilities at $225,000. Is that right? 120 plus 100 plus 5. So 225,000. So once again, they're valuing all of the assets at $225,000, because assets are equal to liabilities-- these are the liabilities right here-- plus equity. So once again, you're saying there's something above and beyond the $140,000 that makes this company special. And an interesting thing to think about-- and we'll address it in the next video-- is which one is a better deal, considering that these companies are pretty similar?