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- Understanding Finance
What does the word „ capitalisation” mean? As the definition states, it is simply „The current market price value of a company’s entire issued securities. This figure includes every security type issued.” (http://www.lse.co.uk/FinanceGlossary.asp?searchTerm=&iArticleID=425&definition=market_capitalisation, January 17, 2005). That is, market capitalisation is the current price at which the market is valuing the company. For instance, if Company X has 10 million shares of 10 USD each, then the market capitalisation of Company X would be 100 million USD.
Although the above definition is a correct one and the one that is accepted by most investors, some, with a more conservative attitude, also add the current long-term debt to the total current market value. The reason for this modification of the original formula is that if an acquisition of the particular company were carried out, the acquirer would also have to pay for these financial assets. The advantage of this method of current market capitalization calculation is that it is now possible to compare two companies, where one has minimal and the other has a large amount of current long-term debt, which often is used to increase the current sales revenue, which would in turn increase the PSR. However, studies have shown that large debt burdens can lower the value, that is, the market capitalization of listed companies. (Hall, 2001, p.4)