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In: Accounting

In a publicly traded organization, why might a company have a market value that differs from...

In a publicly traded organization, why might a company have a market value that differs from the owner's’ equity on the balance sheet?

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Expert Solution

Market value of a company is the price at which the shares are traded in the market multiplied by the number of shares outstanding for the company.

Market value = Number of shares outstanding x market price per share

Book value of the owners' equity = Total asets - Total liabilities of the compnay as per the balance sheet.

The market value may be different from the book value due to

a. The market expects the company's assets to be more valuable than the balance sheet value.

This may be due to the adjustments such as depreciation, which are necessarily to be made in the books.If the company is consistently prefroming well ,by generating consistent profits, the market understands that the value of the asets is much more than the value at which these are shown in the books. Hence the markets places a premium on the share price.

b. The market s react adversely to the performance of a company by a market value lesser than the book value.

In such cases , the company may not be peforming as well as others in the same industry. This makes the market react negatively on the price of the shares of such companies. This makes the market price to be lower than the book value of the company, since the company is not able to meet the performance of the industry .

  

ekkarill92 answered 2 years ago
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