Question

Define and provide an example of “book value.”

This is for a financial analysis class, please use at least 130 words. Thank you!

Answer 1

Book Value refers to the total value of the company at any point of time, which reflects in the financial statements of the company. The word Book value itself defines it which is value in books. In other words, it is the total worth that the company will receive it is liquidated after selling all its assets and paying off its liabilities.

Book Value in terms of asset, refer the value of the asset after taking into consideration, the depreciation accumulated on the asset.

It is to noted that Book value only takes in account the physical assets of a company, any intangible asset such as goodwill should not be considerd while calculating the book value.

We can derive the book value of a company as follows

Book Value = Physical Assets - Intangible Assets - Total Liabilities

So from the value of all the physical assets like, property, plant and equipment and other assets, value of intangible assets like Goodwill, patents is subtracted and then after subtracting the total liabilties which includes repayment of debt, payment to equity shareholders and other liabilities, the amount which is left indicatas the book value.

For better understanding of the concept of Book Value, there an example given below

Assume there is a company X which has Land and Building of $ 1,000,000 and other Physical Assets of $ 1,500,000 also it has Total Liabilities of $ 2,000,000. Then the Book value of the company will be

= 1,000,000 + 1,500,000 -2,000,000

= 2,500,000 - 2,000,000 = $ 500,000

So the book value of the company comes out to be $ 500,000

Book Value has a huge impact on a company because investors would like to invest in those companies which have high Book value. Also the growth opportunities in such companies are high.

Hope I was able to solve your concern. if you are satisfied hit a thumbs up !!