Book Value
Book Value refers to the value of an Asset as recorded on a company’s balance sheet. It is calculated as the original cost of the Asset minus any accumulated Depreciation, Amortization, or impairment costs. Book value can also refer to the net Asset value of a company, calculated as total Assets minus total liabilities.
Examples:
- Example 1: A company purchases machinery for $100,000. After 5 years, with an annual Depreciation of $10,000, the book value would be $100,000 – ($10,000 x 5) = $50,000.
- Example 2: A company has total Assets of $1,000,000 and total liabilities of $600,000. The book value of the company would be $1,000,000 – $600,000 = $400,000.
Cases:
- Case 1: In Mergers and Acquisitions, book value is often used to assess the valuation of a target company. If the market value is significantly higher than book value, it may indicate strong growth potential.
- Case 2: Investors may look at a company’s book value per Share to determine whether a Stock is undervalued. For instance, if the book value per Share is $50, but the Stock trades at $30, it may suggest the Stock is undervalued.