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Book value per share may not approximate market value per share because: a. the book value...

  1. Book value per share may not approximate market value per share because:

a.

the book value excludes common equity.

b.

book values are based on replacement costs  

c.

book value is related to accounting values and market value is related to the future potential as seen by investors.

d.

investors do not understand book value.

Solutions

Expert Solution

Book value per share may not approximate market value per share because :

Answer :- Book value is related to accounting values and market value is related to the future potential as seen by investors.

Explanation :-

There is a difference between book value and market value per share as book value is net worth divided by number of share outstanding so, book value is accounting based , while the market value is the price at which the stock is currently trading .

For example :- Book value of a share is $10 per share but it is currently trading in market for $16 per share , then market value per share is $16 per share. Market value of share is determined by the future earning potential of the share.

So, option (c) is right.

Explanation for rejection of other points :-

Option (a) is wrong as book value doesn't exclude common equity.

Option (b) is wrong as book value is based on historical cost basis.

Option (d) is wrong as book value is very important for investors as investor use book value to estimate whether the share is overvalued or undervalued . So, investor understand book value.

jeff jeffy answered 2 years ago
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