Question

In: Accounting

Book value of stockholders’ equity usually differs from company market value. Explain some reasons why a...

  1. Book value of stockholders’ equity usually differs from company market value. Explain some reasons why a company’s book value of stockholders’ equity can differ from a company’s market value.

Solutions

Expert Solution

The most important reason for this difference is the nature of book value and market value.
See the Book value of equity shareholder's are calculated based on the figures shown in the balance sheet(Net Assets / Shareholder's equity)
However the market value of the company is determined is decided by the demand and supply forces of the market.
Hence it could be said that the basic nature of Book Value and Market value is different as the former is purely based on the book figures
Whereas the latter is based on the decision of the market participants which have liitle effect on the Book value.
Based on the above the following reasons for difference could be stated:
1 Book value is the Net Assets owned by the company wheras Market value is the current market price of equity
2 Book Value per share =Net Assets owned by the company / No. of common shareholders
Market Value per share =No. of common shareholders*Current Market Price
3 Book is not volatile means it does not change frequently, whereas Market value is highly volatile and it can change every minute
as the market price of the shares changes very frequently
4 Book Value shows the position or financial strength of the company at any given date
Market value is the maximum price that the market participants are willing to pay for the company

Related Solutions

Book value of stockholders’ equity usually differs from company market value. Explain some reasons why a...
Book value of stockholders’ equity usually differs from company market value. Explain some reasons why a company’s book value of stockholders’ equity can differ from a company’s market value.
Why the Book Value per Share differs from the company’s stock price? Please explain how the...
Why the Book Value per Share differs from the company’s stock price? Please explain how the PE ratio is utilized for financial analysis purposes by market analysts. Minimum of 150 words.
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?
A. A firm's value-to-book and market-to-book ratios may differ from one for a number of reasons....
A. A firm's value-to-book and market-to-book ratios may differ from one for a number of reasons. Discuss how a successful internally funded research and development program would create a situation where the value-to-book and market-to-book ratios differ from one.
Review of pre-consolidation equity method (controlling investment in affiliate, fair value differs from book value) Assume...
Review of pre-consolidation equity method (controlling investment in affiliate, fair value differs from book value) Assume an investee has the following financial statement information for the three years ending December 31, 2019: (At December 31) 2019 2018 2017 Current assets $285,000 $277,500 $207,000 Tangible fixed assets 662,500 575,000 563,000 Intangible assets 40,000 45,000 50,000 Total assets $987,500 $897,500 $820,000 Current liabilities $120,000 $110,000 $100,000 Noncurrent liabilities 266,250 242,500 220,000 Common stock 100,000 100,000 100,000 Additional paid-in capital 100,000 100,000 100,000...
Explain three reasons why state and local tax differs from federal tax.
Explain three reasons why state and local tax differs from federal tax.
Payout Ratio and Book Value per Share Divac Company has developed a statement of stockholders' equity...
Payout Ratio and Book Value per Share Divac Company has developed a statement of stockholders' equity for the year 2017 as follows: Preferred Stock Paid-In Capital— Preferred Common Stock Paid-In Capital— Common Retained Earnings Balance, Jan. 1 $100,000 $50,000 $400,000 $40,000 $200,000 Stock issued 100,000 10,000 Net income 82,000 Cash dividend -50,000 Stock dividend 10,000 5,000 -15,000 Balance, Dec. 31 $110,000 $55,000 $500,000 $50,000 $217,000 Divac’s preferred stock is $100 par, 8% stock. If the stock is liquidated or redeemed,...
Name TWO reasons why the way firms make decisions in a perfectly competitive market differs from...
Name TWO reasons why the way firms make decisions in a perfectly competitive market differs from price and output decisions by firms in an oligopoly market.
Explain why return on equity, calculated using the financial statements, generally differs from the return on...
Explain why return on equity, calculated using the financial statements, generally differs from the return on the stock calculated using CAPM.
Explain the following terms: Debt vs equity Value vs cost Market vs book value The income...
Explain the following terms: Debt vs equity Value vs cost Market vs book value The income statement GAAP Non-cash items Cash basis vs accrual basis accounting The realization principle Time and costs Taxes
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT