Question

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.

Answer 1

Solution:

Book value of stockholder's equity usually differs from company market value. There are various reasons for the same. Some of these reasons are as under:

1. Book value of stockholder's equity is the difference of Book value Assets and liabililties of the company. However book value of assets shown in balance sheet does not represent fair value of the assets, they are shown at historical cost, therefore fair value of assets are not equal to book value, thus it will result to difference in stockholder's equity and company market value.

2. Company market value is the value of company in financial markets. Market value of the company is not determined by only value of assets and liabilities that company is having. Market value is dependent on various factors like past growth rate, future growth prospective, earning potential, expansion, etc. These factors add/reduce some amount to market value of the company, Therefore book value of stockholder's equity and market value of company differs.