Why a Firms Market Value Differs From Its Book Value Essay

Why a Firms Market Value Differs From Its Book Value - rise ExampleThis paper illustrates that the role of book pass judgments of companies is losing its importance as it tends to be usually lower than securities industry value. The approach taken for accounting is past-oriented from the market value which denotes mostly the companies earnings and hence the difference. This occurs because for military rating of the real value of a company it takes into consideration its earnings measured in money as well as other intangible and tangible assets etc., also unlike the market valuation. There argon many evaluation rules followed and the most relevant of them are the evaluation based on the Economic Value Added (EVA) which is Net Operating Profit Minus Adjusted Taxes reduced by (Invested Capital*Cost of Capital). This method takes into account the opportunity costs of capital. EVA too suffers from the drawbacks as from accounting. Another theory, Shareholder value theory suggests that through the interests of the stakeholders, the stockholder value can be reaped. This is for ensuring lapse satisfaction to all the interested parties in the long run. The stakeholder theory aims at a collective interest of all stakeholders or sees the realization of their goals as the last-ditch objective. Double value creation system is also followed where a company increases its customer value through its operations as well as creates its shareholder value through the sale of its product. Thus, it could be noted that the company value could be increased only if both the shareholders and stakeholders interest are considered simultaneously bandage doing the performance evaluation. This results in the distortions or disparity between the MVE and the CSE (market value and book value) and the conditions for this are (i) Economic rents (unbiased accounting) (ii) Accounting distortions (Perfectly competitive equilibrium) Thus, the information bearing upon the performance evaluation o f a company helps in explaining the reason for the difference between the market value and the book value. Ideally, it could be inferred that the most important things to be considered in value creation processes are 1) The Performance evaluation should be able to provide information for proper decision-making and ensure feedback. 2) The kind and nature of the information collected and the consultation from which the information is collected for valuations are therefore significant. The source, its nature, the methods used for valuation, the coherency, the adaptability with the strategic objectives etc serve as crucial indicators.