Book Value and Market Value Essay

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An interesting phenomenon is to find that a company’s market value is far from its book value. According to General Motor Corporation’s 2007 annual report, GM’s book value per share of common stock was -65.54 dollars in 2007, while its common stock was 25 dollars at the same time. In fact, the gap between book value and market is not only existed in GM Corporation, but also universal. In this essay, factors affecting the gap between book value and market value will be discussed by using Microsoft, General Motor and Ford as examples. Firstly, some underlying theories will be explained, and then the framework of industry level factors, which are the properties of the two different industries, the core competences, and the life cycle stages in which the companies are is used to explain the gap. In the third part, three financial statements will be analysed to examine the items and some adjustments which would impact the figures of company’s book value and market value will be talked. Background Usually, the degree of difference between book value and market value varies in industries. Company’s value can be displayed in two different ways, namely, book value and market value. Book value determines a company’s value by using the figures in balance sheet. The book value can be defined as the company’s total assets minus total liabilities or which means equity expressed in the value of the total shares. In other words, it shows how much would be left if a company is closed and sell all assets and pays all liabilities immediately. The market capitalization of a company is another indicator to show the value of a company. It equals the present share price times the number of shares outstanding. According to the Efficient Market Hypothesis, all relevant information has been reflected in the existing share prices. However, in practice, asymmetric information indeed exists

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