Question

1. Compare and contrast book value per share and market capitalization.

Answer 1

Book value per share:
Book value is calculated using the formula:
Total book value=Total assets-Total liabilities
Book value per share=Total book value/Total number of shares outstanding
This shows the value of a company according to the financial statements. Book value is calculated from the balance sheet.

Example: If a company A has total assets=$100 million and total liabilities=$80 million, the book value of the company=Total assets-Total liabilities
=$100 million-$80 million=$20 million.
This means that after a firm sells its assets and pays off all the liabilities, the net worth or the equity value will be $20 million.
If the number of shares outstanding is say 10 million, then the book value per share will be $20/10=$2  

Market capitalization:

Market capitalization refers to the value of a firm in stock market. It means how much the financial markets values a company.
Market value=Per share price*Number of shares outstanding

If market value>book value, it means that the financial market values the company more than its actual value. This may happen when the investors in stock market have higher expectations on future growth and earnings of the company.
If market value<book value, it means that the financial market values the company less than its actual value. This may happen when the investors in stock market have lower expectations on future growth and earnings of the company.
If market value=book value, it means that the investors in the financial market think that the book values are correct and there is no reason for the market value to be higher or lower than the book value.