Editing Equity (finance) (section)

==== Valuation ====
{{Further|Business valuation|Valuation (finance)#Business valuation}}
A company's shareholder equity balance does not determine the price at which investors can sell its stock. Other relevant factors include the prospects and risks of its business, its access to necessary credit, and the difficulty of locating a buyer. According to the theory of [[Intrinsic value (finance)|intrinsic value]], it is profitable to buy stock in a company when it is priced below the [[present value]] of the portion of its equity and future earnings that are payable to stockholders. Advocates of this method have included [[Benjamin Graham]], [[Philip Arthur Fisher|Philip Fisher]] and [[Warren Buffett]]. An equity investment will never have a negative market value (i.e. become a liability) even if the firm has a shareholder deficit, because the deficit is not the owners' responsibility.

An alternate approach, exemplified by the "[[Merton model]]",<ref>{{cite journal|last1=Merton|first1=Robert C.|title=On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.|journal=Journal of Finance|date=1974|volume=29|issue=2|pages=449–470|doi=10.1111/j.1540-6261.1974.tb03058.x|url=http://dspace.mit.edu/bitstream/handle/1721.1/1874/SWP-0684-14514372.pdf?sequence=1|doi-access=free}}</ref>
values stock-equity as a [[call option]] on the [[enterprise value|value of the whole company]] (including the liabilities), [[Strike price|struck]] at the nominal value of the liabilities.
The analogy with options arises in that limited liability protects equity investors:
(i) where the value of the firm is less than the value of the outstanding debt, shareholders may, and therefore would, choose not to repay the firm's debt;
(ii) where firm value is greater than debt value, the shareholders would choose to repay—i.e. exercise their option—and not to liquidate.
<!-- This "structural model" approach, models [[bankruptcy]] using a microeconomic model of the firm's [[capital structure]]: bankruptcy is seen as a continuous [[probability of default]], where, on the "random" occurrence of [[debt default|default]], the stock price of the defaulting company is assumed to go to zero.
<ref>Robert Merton, "Option Pricing When Underlying Stock Returns are Discontinuous" ''Journal of Financial Economics'', 3, January–March, 1976, pp. 125–44.</ref> -->