Why is market value of the company is different than the book value?



0
Why is market value of the company is different than the book value?

1 Answer(s)


0

Book value of a company is that value of the company on the Book, in financial terminology this book is the Balance sheet. And the Book value is the difference between the company total asset minus the company total liability. Market value of a company is value of the company seen by he stock market. Lets take an example to understand it clearly.

Suppose: -
Asset = 1000000
Liability = 500000

So the Book value of a company = 1000000 - 500000 = 500000

Now suppose total outstanding share = 50000
So according to the book value the price of share should be 500000/50000 = 10/-

But now suppose the Market/Investor think that this company has better prospect in future and demand of the share is more in the market so the price of the stock will rise and suppose he price rose to the 15/-share so the Market value of the share will become

15 * 50000 = 750000/- which is greater than the Book value.

Vice versa may be also possible means market value will less than the book value, if the the valuations and future prospects of the company is not good. In this case stock will trade lesser thank it book value per share.