For a firm having common and preferred equity as well as debt, common equity value can be estimated in which of the following ways?

Question

Quizplus · Accepted Answer

Common equity value can be estimated by subtracting the market value of debt and the market value of preferred equity from the enterprise value of the firm. This is because the enterprise value includes the value of all the firm's assets, including debt and preferred equity. By subtracting the market values of these liabilities, we obtain the total value of the firm's common equity. Option A is incorrect because it uses the book value of preferred equity, which may not reflect its true market value. Option B is incorrect because it only considers the market value of debt, but does not account for the value of preferred equity. Option D is incorrect because it adds the market value of preferred equity, which is not part of the common equity value. Option E is incorrect because it uses the book value of preferred equity instead of the market value.

For a Firm Having Common and Preferred Equity as Well