There are two different values; book value and the market value. Book value is the amount paid for an asset. It can be thought of a historic price, originally paid for an asset. It remains the same. For example, if a person buys an equipment for $1,800, the book value of the equipment will be $1,800 forever. The market price/value is the current prevailing price of an asset. For example, in the above case, assume the equipment can be sold currently in the market for $600. The value of equipment went down due to its wear and tear with time. So, the market value of the equipment is $600. Market value can keep on changing with time. Market value reflects the amount we get by selling an asset at the present time. Hence we can say that the market value is more important relative to book value as it is associated with the present time while book value is associated with the past time value; already over. This article can give the help with accounting assignment.
Now, the question is ‘can we trust the book value as an investor?’ It asks if you are an investor, whether your investment decision should be based on the valuation including the book value. If you are considering to invest in a stock, you will be having a question that is it reliable to make decisions based on its book value. The book value of a public company includes the historic price of all assets of the company. When this book value is divided by the number of outstanding shares, the result is the book value per share. Investors evaluate a stock by the ratio of the stock’s price per share (P) and the stock’s book value per share (B). The P/B ratio of a stock normally indicates the investors the status of the stock. For example, if the P/B ratio of a stock is less than one, it means the stock is underpriced and there is a scope for the stock price to rise. In this scenario, investors would like to buy the stock. If the P/B ratio of a stock is more than one, it means the stock is overpriced and there is a chance for the stock price to get down. In this scenario, investors would like to sell/ short sell the stock. If the P/B ratio of a stock is equal to one, it means the stock is fairly priced. So, we see here that the investors rely on the book value to take their decision to a large extent. Now the question is whether such dependence in book value for investment decision is realistic approach or not. This topic can be relevant to provide the finance assignment help. Let’s analyze this issue.
The book value of a company includes the book value of all assets. Companies in different industries mention the book value in different ways. Even in the same industry, different companies record book value differently depending upon the estimations, assumptions and practices they have adopted.
Depreciation is one of the factors that has a great impact on the book value. Different companies use different method of depreciation for the long lived assets. Depending on the method, the book value of a year changes. It results different conclusions based on the P/B ratio analysis, applied in these companies, even if, in reality, there is not much difference. Finance essay writer can get a clear concept through this article. For example, assume two companies; Company A and Company B has purchased a depreciable long term asset of the same cost. Consider, Company A uses double declining depreciation method and so it has more depreciation expenses in the early years of the useful life of an asset as compared to the Company B, which uses the straight line depreciation method. This results the net book value of asset of Company A is less than that of Company B. It shows that the value of book value can be altered by the change in depreciation method only, though all the situations are kept constant. If the company depreciates its asset slower than the reduction of its market value, the mentioned book value would be considered as overstated. Similarly, if the company depreciates its asset faster than the reduction of its market value, the mentioned book value would be considered as understated. Making decision based on book value can cause an investor a loss, though he is right with the provided book value. So, investors should not blindly use the book value in their analysis. Instead, they should dig data to get the clear picture behind the stated book value. Such information can provide the corporate finance homework help.
Depreciation is one of the factors that has a great impact on the book value. Different companies use different method of depreciation for the long lived assets. Depending on the method, the book value of a year changes. It results different conclusions based on the P/B ratio analysis, applied in these companies, even if, in reality, there is not much difference. Finance essay writer can get a clear concept through this article. For example, assume two companies; Company A and Company B has purchased a depreciable long term asset of the same cost. Consider, Company A uses double declining depreciation method and so it has more depreciation expenses in the early years of the useful life of an asset as compared to the Company B, which uses the straight line depreciation method. This results the net book value of asset of Company A is less than that of Company B. It shows that the value of book value can be altered by the change in depreciation method only, though all the situations are kept constant. If the company depreciates its asset slower than the reduction of its market value, the mentioned book value would be considered as overstated. Similarly, if the company depreciates its asset faster than the reduction of its market value, the mentioned book value would be considered as understated. Making decision based on book value can cause an investor a loss, though he is right with the provided book value. So, investors should not blindly use the book value in their analysis. Instead, they should dig data to get the clear picture behind the stated book value. Such information can provide the corporate finance homework help.
Hence, for investors, book value is one of the factors that needs to be analyzed properly, if the book value is included in the analysis part of investments. Its investors’ responsibility to find out whether the stated book value in the financial statement of the company is really representing the actual value of the asset or not.