Book value
In financial or accounting terms book value is the value at which an asset is shown in the balance sheet, which is generally at its historical cost less accumulated depreciation. Book value therefore means that an asset’s value to the business is measured in terms of what it cost to acquire, i.e. its historic value, less an allowance for depreciation, rather than its current value.
Market value
The market value is the value or price for which a share currently trades in the marketplace, usually determined by the interaction of supply and demand for the share. Because the market value is based on the dynamics of supply and demand, which is often the result of speculative motives or sentiment, if often does not indicate the ‘true, or real’ value of the share in the company.
Intrinsic (or economic) value
This value is considered to be the ‘real’ value of a share, and is equivalent to the present value of all the asset's expected future cash flows discounted at the investor’s appropriate risk-adjusted required rate of return. Intrinsic value represents an individual investor's own personal perception or interpretation of an asset's value. Intrinsic value may or may not equal market value, although in an efficient market they should be equal.
It is very useful to calculate the intrinsic value of a share because this would indicate whether the market price is currently under or over valued.
Intrinsic value can be calculated by using the famous CAPM (Capital Asset Pricing Model) which is examined in both ACCA Paper P4 and ACCA Paper F9.
Liquidation value
This is the price an individual asset would fetch if the business discontinued its operations and all its assets were sold. The liquidation value of an asset is likely to be less than its book, market or intrinsic value.
The knowledge contained this ACCA study tip examinable in the ACCA Paper F9 and ACCA Paper P4. For more help, see what ACCA study guides TonySurridge.co.uk has to offer.
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