Question

Discuss the difference between book values and market values and explain which one is more important to the financial manager and why.

Answer 1

BOOKVALUE

It is the historical cost of an asset or it is the cost of purchase of an asset adjusted with depreciation. It is the value shown on balance sheet. It is the amount we get when the company got liquidated. It is the actual worth of asset. Book value do not change frequently.

MARKET VALUE

Is the value of asset in the market if it is traded. Market value can be obtained by multiplying total number of shares with current market price per share. A change in market value can happen if there is any change in profitability liquidity of a company. It is the projected value of asset. Market value changes frequently. It reflects market trends and is the intrinsic value of asset.

Main aim of financial managers is to maximise shareholders wealth and pay more dividends there by increasing market value of the firm.Market value is more important as it is more up to date. A financial manager valuates market value of assets or firm. Market value increases when the market thinks that firm have higher value as the earnings of company are high. So the financial manager gives more importance to market value rather than book value.

If market value is greater than book value means market is giving high value to the firm. But if book value is higher than market value that means shareholders are loosing confidence in the company.