How Are Book Value and Market Value

Different?
BY CHRIS B. MURPHY

Updated Mar 12, 2019

Although investors have many metrics for determining the valuation of a company's
stock, two of the most commonly used are book value and market value. Both
valuations can be helpful in calculating whether a stock is fairly valued, overvalued or
undervalued. In this article, we'll delve into the differences between the two and how
they are used by investors and analysts.

Book Value
The book value of a stock is theoretically the amount of money that would be paid to
shareholders if the company was liquidated and paid off all of its liabilities. As a result,
the book value equals the difference between a company's total assets and total
liabilities. Book value is also recorded as shareholders' equity. In other words, the book
value is literally the value of the company according to its books (balance sheet) once
all liabilities are subtracted from assets.

The need for book value also arises when it comes to generally accepted accounting
principles (GAAP). According to these rules, hard assets (like buildings and equipment)
listed on a company's balance sheet can only be stated according to book value. This
sometimes creates problems for companies with assets that have greatly appreciated -
these assets cannot be re-priced and added to the overall value of the company.

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The Difference Between Book and Market Value

Calculating The Book Value Of Bank of America Corporation (BAC)

Below is the balance sheet for the fiscal year ending for 2017 according to the bank's
annual 10K statement.

 Assets totaled $2,281,234 trillion.

 Liabilities totaled $2,014,088 trillion.
 The book value was $267,146 billion as of the end of 2017.

In theory, if Bank of America liquidated all of its assets and paid down its liabilities, the
bank would have roughly $267 billion left over to pay shareholders.
Market Value
The market value is the value of a company according to the financial markets. The
market value of a company is calculated by multiplying the current stock price by the
number of outstanding shares that are trading in the market. Market value is also known
as market capitalization.

For example, Bank of America had over 10 billion shares outstanding (10,207,302,000)
as of the end of 2017 while the stock traded at $29.52 making BofA's market value or
market capitalization at 301 billion (10,207,302,000 * 29.52).

How Book Value & Market Value Are Interpreted

When the market value of a company is less than its book value, it may mean that
investors have lost confidence in the company. In other words, the market
may not believe the company is worth the value on its books or that there are enough
future earnings. Value investors might look for a company where the market value is
less than its book value hoping that the market is wrong in its valuation.

For example, during the Great Recession, Bank of America's market value was below
its book value. Now that the bank and the economy have recovered, the company's
market value is no longer trading at a discount to its book value.

When the market value is greater than the book value, the stock market is
assigning a higher value to the company due to the earnings power of the company's
assets. Consistently profitable companies typically have market values greater than
their book values because investors have confidence in the companies' ability to
generate revenue growth and ultimately earnings growth.

When book value equals market value, the market sees no compelling reason to
believe the company's assets are better or worse than what is stated on the balance
sheet.

The Bottom Line

Book value and market value are two fundamentally different calculations that tell a
story about a company's overall financial strength. Comparing the book value to the
market value of a company can also help investors determine whether a stock is
overvalued or undervalued given its assets, liabilities and its ability to generate income.
However, with any financial metric, it's important to recognize the limitations of book
value and market value and use a combination of financial metrics when analyzing a
company.

For more on this topic including examples, please read Market Value Versus
Book Value and Using the Price-to-Book Ratio to Evaluate Companies.

https://www.investopedia.com/ask/answers/how-are-book-value-and-market-value-different/
The difference between book value and
market value
December 28, 2017
The book value of an asset is its original purchase cost, adjusted for any subsequent changes, such as
for impairment or depreciation. Market value is the price that could be obtained by selling an asset on a
competitive, open market. There is nearly always a disparity between book value and market value , since
the first is a recorded historical cost and the second is based on the perceived supply and demand for an
asset, which can vary constantly.

For example, a company buys a machine for $100,000 and subsequently records depreciation of $20,000
for that machine, resulting in net book value of $80,000. If the company were to then sell the machine at
its current market price of $90,000, the business would record a gain on the sale of $10,000.

As indicated by the example, the disparity between book value and market value is recognized at the
point of sale of an asset, since the price at which it is sold is the market price, and its net book value is
essentially the cost of goods sold. Prior to a sale transaction, there is no reason to account for any
differences in value between book value and market value.

One case in which a business can recognize changes in the value of assets is for marketable
securities classified as trading securities. A business is required to continually record holding
gains and holding losses on these securities for as long as they are held. In this case, market value is the
same as book value.

When the difference between book value and market value is considerable, it can be difficult to place a
value on a business, since an appraisalprocess must be used to adjust the book value of its assets to their
market values.

There are situations when the market value of a fixed asset is much higher than book value, such as
when the market value of an office building skyrockets due to increased demand. In these situations ,
there is no way under Generally Accepted Accounting Principles (GAAP) to recognize the gain in a
company's accounting records. However, revaluation is allowed under International Financial Reporting
Standards (IFRS).
https://www.accountingtools.com/articles/what-is-the-difference-between-book-value-and-market-
value.html

Key Differences between Book Value vs

Market Value of Equity
Let us have a look at the key differences between book value vs market value:

 Book value is the value of an asset reported in the balance sheet of the firm.

Market Value is the current valuation of the firm or assets (the ongoing price

of the share) in the market on which it can be bought or sold.

 Book value gives us the actual worth of the assets owned by the company

whereas Market value is the projected value of the firm’s or the assets worth

in the market.

 Book value is equal to the value of the firm’s equity while Market value

indicates the current market value of any firm or any asset.

 An investor can calculate the book value of an asset when the company

reports its earnings on a quarterly basis whereas Market Value changes every

single moment.

 Book value shows the actual cost or acquisition cost of the asset whereas

market value indicates the current market trends.

 Book value is the accounting value of an asset and is less relevant at times

when a company is actually planning to sell that asset in the market; in

 comparison market value reflects more accurate valuation of an asset during

buying and selling of that asset.

 Book value of an asset is accounted in the balance sheet based on historical

cost, amortized cost or fair value. Market value reflects the fair value or market

value of an asset.

Book Value vs Market Value of equity – Head

to Head Comparison
Basis of Comparison Book Value Market

Value

Book value is the real worth of the Market value is defined a

assets of the company. It is the maximum price at which

Meaning
actual worth of the asset of the security can be bought o

company. market.

Reflects The firm’s equity. The current market price

Book value is calculated by taking The market value of a co

Basis of Calculation the difference between assets and calculated by multiplying

liabilities in the balance sheet. price per share of the com

 the number of outstandin

Happens at periodical intervals i.e. Very frequent. Market va

Frequency of Fluctuations
infrequent. fluctuates every now and

Book value of an asset is accounted

in the balance sheet based on Market value reflects the

Measurement Bases
historical cost, amortized cost or fair or market value of an ass

value

Book value vs Market Value – Conclusion

 Market Value vs Book Value of equity are widely used by investors to value an

asset class. Comparing market value vs book value for a company indicates

whether the company is undervalued or overvalued. If the market value is less

than the book value it implies the stock is trading at a discount and vice versa.

 Book value is the accounting value of an asset and often does not reflect the

true market value at which an asset can be bought or sold. Market value

provides more accurate current value as it reflects the demand and supply of

an asset. Several multiple valuation techniques like (PE ratio, PB ratio, EV to

EBITDA Ratio) use market value or the book value as one of the variables.

Video on Book Value Vs Market Value

https://www.wallstreetmojo.com/book-value-vs-market-value/

M&A Viewpoint: The Value, Price and Cost of Acquisitions

(Part 1 of 3)

What is the difference between the value, price and cost of an acquisition and why should you care? After
all, the terms are often used interchangeably. It's not uncommon to hear business buyers say: "The seller
accepted our valuation of $25 Million." "We paid the seller's price of $25 Million." "That deal cost us $25
Million."

Each expression leaves you with the general impression that the buyer shelled-out somewhere in the
neighborhood of $25 Million for the company. While this might suffice for pedestrian conversation, M&A
analysis and planning requires a deeper understanding of each term and its significance to the
dealmaking process.

An asset's value is different from what you're willing to pay for it, and the price you're willing to pay is
different from the total cost of obtaining control of the asset. Each word has its own distinct meaning.
When we talk about value in the M&A context, we are really talking about Fair Market Value (FMV).

Just what is Fair Market Value?

The classic definition of FMV is the price, in terms of cash or equivalent, that a buyer could reasonably be
expected to pay, and a seller could reasonably be expected to accept, if the business were exposed for
sale on the open market for a reasonable period of time, with both buyer and seller being in possession of
the pertinent facts and neither being under any compulsion to act.

When it comes to valuing privately held businesses, there is no "Blue Book" or other so-called definitive
source to consult. Each business is unique from every other one. If you want to know the value of a
privately held business, you are going to need a valuation.

You'd think it would be easy to determine the value of a publicly traded company, right? Just find out the
price-per-share at the close of a given day and multiply it by the number of shares outstanding. Sorry.
The quoted trading price of a publicly traded equity security is based on a single share or small block of
shares. You still need to consider the principles of valuation and arrive at an appropriate "control
premium" before you can zero in on the company's FMV. The single-share price gives you a starting
point, but you still need a valuation.

A fair market valuation is an estimate or opinion of the theoretical worth of a company's equity based
upon its underlying assets, income generating ability, and comparable transactions. There are accepted
procedures, methods and formulae for preparing valuations. These accepted approaches and methods
have been tested in tax, legal and other contentious matters. The documentation included with
MoneySoft's Corporate Valuation Professional™ software summarizes the three main approaches as
follows:

"The Asset Approach is generally considered to yield the minimum benchmark of value for an operating
enterprise. The most common methods within this approach are Net Asset Value and Liquidation Value.
Net Asset Value represents net equity of the business after assets and liabilities have been adjusted to
their fair market values. Liquidation Value represents the present value of the estimated net proceeds
from liquidating the Company's assets and paying off its liabilities.

The Income Approach estimates the value of a specific benefit stream with consideration given to the risk
inherent in that stream. This approach is based on the fundamental investment principle that the overall
value of an investment is equal to the present value of all future benefits that accrue to the investor. The
most common methods under this approach are Capitalization of Earnings and Discounted Future
Earnings. Under the Capitalization of Earnings method, normalized historic earnings are capitalized at a
rate that reflects the risk inherent in the expected future growth in those earnings. The Discounted Future
Earnings method discounts projected future earnings back to present value at a rate that reflects the risk
inherent in the projected earnings.

The Market Approach compares the subject company to the prices of similar companies operating in the
same industry that are either publicly traded or, if privately owned, have been sold recently. A common
problem for privately owned businesses is a lack of publicly available comparable data."

The valuation methods and approaches used in Corporate Valuation Professional and DealSense™ were
designed in collaboration with Practitioner Publishing Company (a Thomson Company) and conform to
their "Guide to Business Valuations", edited by Dr. Shannon Pratt and other highly recognized valuation
authorities. You gather the numbers and background information and apply good judgment, and
MoneySoft takes care of the math and modeling.

Which valuation approach is appropriate?

Different valuation approaches will frequently yield strikingly different results for a given company. It's the duty of the analyst
or valuator to select the approach that is most appropriate given the facts and circumstances of the company. Here are a
few examples of how different approaches can produce different values:

 The asset approach might be most appropriate when valuing a mature, capital-intensive company
with steady sales and marginal profitability in a competitive industry. On the other hand, if you
apply the income approaches to such a company, the resulting value would be a fraction of its
underlying assets, less if you deduct the company's debt.The income approach may best suit a
company that has a history of earnings but few tangible assets, such as an engineering firm. Now
in this case, if you rely on the asset approach, you'll probably get a value that represents pennies
on every dollar of cash flow-a good deal if you could get it, but hardly a reasonable valuation.
 The market or comparable approach may favor a younger company with little sales and no
significant earnings in a "hot sector" such as a technology company before the "dot.bombs"
exploded. Since the company has no assets and no income, just a lot of promise (sounds like a
good deal, right?), both the asset and income approach are going to yield low (if any) values.

So which approach is right for valuing a given company? The one that is most appropriate given the
industry, financial position and other related acts and circumstances. Nobody said it would be easy!
You've got to exercise some discipline, do some digging and apply good judgment. Here again,
MoneySoft's software systems can help streamline and automate the process so you can focus on the
critical judgment issues necessary for a supportable valuation.

Why is it wise for a buyer to obtain a fair market valuation?

The chances are pretty good that a buyer is going to pay more than FMV for the company. A diligent
buyer (as opposed to a negligent one) should know the spread between FMV and the price they are
willing to pay. Without a fair market valuation, a buyer has no meaningful benchmark of value other than
what they are willing to pay.

The spread between the seller's asking price and the fair market valuation serves as a useful reference
point for "reality testing" and determining how deep the buyer is going to have to dig to find synergies (the
rationale we use to justify a higher than market price). The spread between price (plus acquisition related
costs) and FMV represents a financial risk that the buyer must carry.
If the deal goes south and you have to divest the company, the market value serves as a baseline of what
you might expect the company to fetch. Of course, this assumes that there has not been any significant
deterioration of value after the closing.

So, maybe you're thinking: "Gee, that's nice, but why should I REALLY worry about FMV?"

Do the letters CYA meaning anything to you? In this case the "A" is your professional reputation and your
legal posterior. If a premium over market value is paid and the deal is successful, you're a hero. On the
other hand, if the deal turns into a disappointment, you are going to have to clean up the mess. In
addition, members of the board of directors or shareholders might start asking uncomfortable questions
such as: "What the hell were you thinking by paying that much?" Without a valuation and a reasonable
justification for the spread between that value and the purchase price, you might find yourself on the hot
seat, or worse.

Should the valuation be prepared internally or by an independent professional?

Our recommendation is to do both. An independent, outside valuation is a prudent step. It can't hurt to
carefully consider an outsider's opinion of value. In addition, by preparing your own internal valuation
study, you will gain a richer insight into the company and the factors that drive its valuation. The exercise
will be good for you. If you've obtained an independent valuation, your internally prepared valuation will
provide an intelligent way to bridge any gaps that might exist between your perception of value and the
independent one. If you rely totally upon the outside valuation, you might face the questions: "Well, didn't
you do anything internally to verify the valuation or did you just accept it on the basis of the valuator's
credentials?" I don't know about you, but I would like to do more than hide behind a hired gun's
credentials. He might not be that good of a witness. Worse yet, he could be flat wrong. Remember in
practically all matters of valuation that are litigated, half of the experts are on a losing team. In some
cases both are adjudicated as wrong and the judge issues a "settlement value."

So, assuming that you followed this recommendation, you will have an internal valuation and an outside
valuation plus a diligent understanding and reconciliation of the differences between the two. The next
step determines the price-what you are willing to pay. We'll cover that in the next M&A Viewpoint.

By Robert B. Machiz
CEO MoneySoft, Inc.

http://www.mergerdigest.com/price_cost.html