Question

1. Why does market value of debt differ from book value of debt? Is the difference between book value and market value of equity generally larger than that of debt? Explain.

Answer 1

The market value of debt refers to the amount of bank debt that firms have but do not directly report on their balance sheet. Hence, it has to be calculated.

Whereas the book value of debt literally means the value of a business according to its books (accounts) that is reflected through its financial statements.

Book value and Market value are key techniques, used by investors to value asset classes (stocks or bonds). Book value is the value of the company according to its balance sheet. Market value is the value of a stock or a bond, based on the traded prices in the financial markets. Though the market value can be calculated at any point in time, an investor gets to know the book value when a company files it’s earning on a quarterly basis.

The book value of an asset is strictly based on the balance sheet or “Books” of the company. Book value is calculated by taking the difference between assets and liabilities on the balance sheet. It is also known as Shareholders’ equity or net worth and can be derived from the accounting equation assets= liabilities+ shareholder’s equity.

The market value of an asset is assigned by the investors on that particular date i.e. based on the current price of that asset traded in the financial markets. It is calculated by multiplying the market price per share of the company with the number of outstanding shares. It can vary and at any point in time, it can be more or less than book value.

Book value is the value of an asset reported in the balance sheet of the firm. Market Value is the current valuation of the firm or assets (the ongoing price of the share) in the market on which it can be bought or sold.

Book value gives us the actual worth of the assets owned by the company whereas Market value is the projected value of the firms or the assets worth in the market.

Book value is equal to the value of the firm’s equity while market value indicates the current market value of any firm or any asset.

An investor can calculate the book value of an asset when the company reports its earnings on a quarterly basis whereas market value changes every single moment.

Book value shows the actual cost or acquisition cost of the asset whereas the other indicates the current market trends.

Book value is the accounting value of an asset and is less relevant at times when a company is actually planning to sell that asset in the market; in comparison market value reflects the more accurate valuation of an asset during buying and selling of that asset.

Book value of an asset is accounted in the balance sheet based on historical cost, amortized cost or fair value. Market value reflects the fair value or market value of an asset.

CONCLUSION

Market Value and Book Value of equity are widely used by investors to value an asset class. Comparing both for a company indicates whether the company is undervalued or overvalued. If the market value is less than the book value it implies the stock is trading at a discount and vice versa.

Book value is the net assets value of the company and is calculated as the sum of total assets minus the amount of intangible assets and is always equal to the carrying value of assets on the balance sheet while market value as the name suggests that the value of the assets that we will receive if we plan to sell it today.