Can a company have a negative Equity Value? What is true?

Can a company have a negative Equity Value? What is true?

• A. No, you cannot have a negative share price or negative shares outstanding.
• B. Yes, it can be negative in some rare cases.
• C. Only for banks.
• D. Only if debt is negative.

Answer: (A)

Equity value in market terms is the market capitalization, calculated as share price times shares outstanding. Both components are nonnegative: a stock price can’t be below zero and you can’t have a negative number of shares outstanding. Therefore their product can’t be negative. A company can have negative book equity on its balance sheet if liabilities exceed assets, but that doesn’t make the market value of its equity negative; as long as the stock trades at a nonnegative price, market capitalization stays nonnegative. The other statements don’t apply to why equity value can’t be negative.

Equity value in market terms is the market capitalization, calculated as share price times shares outstanding. Both components are nonnegative: a stock price can’t be below zero and you can’t have a negative number of shares outstanding. Therefore their product can’t be negative. A company can have negative book equity on its balance sheet if liabilities exceed assets, but that doesn’t make the market value of its equity negative; as long as the stock trades at a nonnegative price, market capitalization stays nonnegative. The other statements don’t apply to why equity value can’t be negative.