Question

Concept: "The Relevance of Market Values over Book Values”

1. The student’s understanding (in own words) of the concept/principle:
2. A practical example illustrating the concept/principle: The rationale or reason why the concept is important in economics:
3. What two (2) critical assumptions underlie the concept/principle?
4. Provide two (2) critiques or counters of the assumptions outlined above..

Answer 1

Answer:

The student’s understanding (in own words) of the concept/principle:

The book value of an asset is its original purchase cost, adjusted for any subsequent changes, such as depreciation. Market value is the price that could be obtained by selling an asset on a competitive, open market. Book value of an asset shows the cost when it was actually purchased while market price shows the current situation of the asset’s cost which is prevailing in the market. The market value weights are more relevant because they represent a more current valuation of the debt and equity instruments.

A practical example illustrating the concept/principle:

ABC company has total assets of $200 million and total liabilities of $160 million, the book value f the company is $40 million. It means that if company will sell its assets and pay its liabilities the net worth of the business would be $40 million.

The rationale or reason why the concept is important in economics:

The concept of market value and book value is important in economics because it represents true picture and so it is helpful in taking the right decisions.

What two (2) critical assumptions underlie the concept/principle:

1. Assets can lose economic value more rapidly than originally predicted.

2. Goodwill and real property are two major intangible assets for which there is no depreciation or amortization.

Provide two (2) critiques or counters of the assumptions outlined above:

1. When assets impairments which are not clear and remained unidentified it is difficult for the investors to evaluate and to take right decisions.

2. At the time of corporate restructuring all the intangible assets are evaluated.