Question

Our text states the “Market values of assets and liabilities do not generally equal their book...

Our text states the “Market values of assets and liabilities do not generally equal their book values.” Why? How would this affect a bank looking at a company’s balance sheet while considering a long-term loan request from that company?

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Answer #1

Yes, Market values of assets and liabilities do not generally equal their book values because of the following reasons:

  1. Book value is based on historical or fair value of assets and liabilities while market value is based on the current market value of assets and liabilities.
  2. Historical value does not change while market value keeps changing based on current prevailing market scenario and prices.

While considering loan application of company, banks checks the balance sheet and income statement, bank's official analyzes the current market worth of company and the current value of total liabilities, it also analyzes whether company has enough assets so that in case of default, bank will recover the payment of loan by selling assets. It also checks the historical cost of assets and how much depreciation has been deducted till date.

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