equity

(noun)

Ownership interest in a company as determined by subtracting liabilities from assets.

Related Terms

Examples of equity in the following topics:

  • Owners' Equity

    • Shareholders' equity is the difference between total assets and total liabilities.
    • Ownership equity may include common stock, preferred stock, retained earnings, treasury stock, and reserve.
    • If liability exceeds assets, negative equity exists.
    • Ownership equity is also known as risk capital or liable capital.
    • Accounts listed under ownership equity include (for example):

  • Equity Finance

    • Companies can use equity financing to raise money and/or increase shareholder liquidity (through an IPO).
    • Financing a company through the sale of stock in a company is known as equity financing.
    • In finance, the cost of equity is the return, often expressed as a rate of return, a firm theoretically pays to its equity investors, (i.e., shareholders) to compensate for the risk they undertake by investing their capital.
    • Firms obtain capital from two kinds of sources: lenders and equity investors.
    • Such costs are separated into a firm's cost of debt and cost of equity and attributed to these two kinds of capital sources.

  • Equity Theory

    • Equity theory states that perceptions of equality in the input/outcome ratio of employees determines their relative job satisfaction.
    • Thus, groups will evolve such systems of equity, and will attempt to induce members to accept and adhere to these systems.
    • According to equity theory, the person who gets "too much" and the person who gets "too little" both feel distressed.
    • Individuals who discover they are in inequitable relationships will attempt to eliminate their distress by restoring equity.
    • Employees expect a fair return for what they contribute to their jobs, a concept referred to as the "equity norm."

  • The Accounting Equation

    • The accounting equation is a general rule used in business transactions where the sum of liabilities and owners' equity equals assets.
    • A company with $30,000 in liabilities and $10,000 in owners' equity would have $40,000 in assets according to the accounting equation.
    • The fundamental accounting equation, which is also known as the balance sheet equation, looks like this: $\text{assets} = \text{liabilities} + \text{owner's equity}$.
    • On the right side of the equation are claims of ownership on those assets: liabilities are the claims of creditors (those "outside" the business); and equity, or owners' equity, is the claim of the owners of the business (those "inside" the business).
    • If the company issues stock to obtain the funds for the purchase, then assets and equity both increase.

  • Defining the Balance Sheet

    • Assets, liabilities, and ownership equity are listed as of a specific date, such as the end of the company's financial year.
    • A standard company balance sheet has three parts: assets, liabilities, and ownership equity.
    • Another way to look at the same equation is that assets equals liabilities plus owner's equity.
    • Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity).
    • This balance sheet shows the company's assets, liabilities, and shareholder equity.

  • Pay

    • By considering internal and external equity, a company can work toward a fair base pay system, attracting and retaining the best employees.
    • The manager looks at the internal and external equity to determine that $8.00 an hour is a fair base pay for workers.
    • An important question in external equity is how you define your market.
    • How do companies combine internal and external equity to decide the pay associated with each job?
    • Combine internal equity and external equity analysis to determine fair pay

  • Promotional Objectives

    • A promotional plan can have a wide range of objectives, including: sales increases, new product acceptance, creation of brand equity, positioning, competitive retaliations, or creation of a corporate image.
    • A promotional plan can have a wide range of objectives, including: sales increases, new product acceptance, creation of brand equity, positioning, competitive retaliations, or creation of a corporate image.

  • Financing Company Operations

    • Examples of bootstrapping include: Owner financing, sweat equity, minimization of the accounts receivable, joint utilization, delaying payment, minimizing inventory, subsidy finance, and personal debt.
    • Examples of Bootstrapping: Owner financing Sweat equity Minimization of the accounts receivable Joint utilization Delaying payment Minimizing inventory Subsidy finance Personal Debt
    • In many cases, these services are in return for an equity stake.

  • Assets

    • That is, the total value of a firm's assets are always equal to the combined value of its "equity" and "liabilities. " In other words, the accounting equation is the mathematical structure of the balance sheet.

  • Financial Leverage

    • Financial leverage is a technique used to multiply gains and losses by obtaining funds through debt instead of equity.
    • A public corporation may leverage its equity (stocks outstanding) by borrowing money.
    • The more it borrows, the less equity capital it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result.
    • Accounting leverage is total assets divided by the total assets minus total liabilities (or total equity).
    • Notional leverage is total notional amount of assets plus total notional amount of liabilities divided by equity.