Most Probable Selling Price (MPSP) in Relation to Equity
The Most Probable Selling Price (MPSP) is the price for the tangible assets and the Goodwill being transferred. We don't sell equity, yet we sell the “value of equity”, this is what is most often determined using the Income Approach.
Definitions of Equity
- Typically, the price paid or received for shares (usually a small minority holding) of common stock interest in a company.
- GAAP definition of Equity: Total assets - Total liabilities.
- Equity is what a common stockholder would receive if the company were sold.
Market Capitalization of Equity (Enterprise Value)
Enterprise Value = MC (Market Capitalization or Common Stock) + Total Debt (long term + short term) (-) minus Cash.
Equity to MPSP (Most Probable Selling Price)
The application of the Income Approach usually delivers the fair market value of equity (stock) or Market Value of Invested Capital (MVIC), these need to be converted to the Most Probable Selling Price (MPSP).
Most Probable Selling Price
CAS = Current Assets to be Sold
Market Value of Invested Capital (MVIC) = Equity + Interest Bearing Debt
Net Working Capital (NWC) = Current Assets – Current Liabilities
MPSP – CAS = MVIC – NWC
Therefore,
Most Probable Selling Price (MPSP) = Equity + Interest Bearing Debt – NWC + CAS