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Book Value, Liquidation Value and Market Value of Shares Essay

Book value: The book value of ordinary share is the net worth of a corporation less the par value of preference shares outstanding divided by the number of ordinary shares outstanding. Suppose the net worth of a company contains the following information viz; Preference shares (Rs. 100 per share): 1000000. 00 Ordinary share (Rs. 5 per share): 1500000. 00 Share premium: 1000000. 00 Retained earnings: 500000. 00 4000000. 00 Book value of ordinary share: 300000/30000 = 10 per share

Theoretically, the book value of a share should correspond to the liquidating value of the company; however, in reality this situation never occurs. Only if the assets of a company can be liquidated for the book values shown on the financial statements, then book value per share is equal to the liquidating value per share. Even, then if liquidating costs are high, the liquidating value per share will be less than book value per share.

For many companies, the liquidating value per share is less than book value per share because many of the assets can be liquidated only at reduced prices. However, some companies carry certain assets –notably, land mineral rights – at modest values on their books relative to the market value of the asset. For these companies, the liquidating value per share may be significantly higher than the book value. Sometimes, investors calculate the net working capital per share in order to obtain a more conservative estimate of the possible liquidating value of a company.

Market value: The market value per share is the current price at which the stock is traded. For listed companies and the shares of a company which are actively traded in the stock markets, market price quotations are readily available. However, the market for the shares of many companies is thin and inactive, so that market price information about its shares is difficult to obtain. Even when obtainable, the information may reflect only the sale of a few shares and not specify the market value of the firms as a whole.

For companies of this sort, care must be taken in interpreting market price information. The market value of ordinary share usually differs considerably from its book value and its liquidating value. Market value is a function of the current and expected future dividends of the company and the perceived risk of the shares on the part of investors. Because these factors bear only a partial relationship to the book value and the liquidating value of the company, the market value per share is not tied closely to these values.

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