Compare and contrast the book value & liquidation value per share for common stock. Is one method more reliable? Describe.
The Book Value of a firm's common stock is found by subtracting the value of the firm's liabilities, and preferred stock, if any, as recorded onto the balance sheet, from the value of its assets. The result is the book value or overall worth of the company's common stock. In order to find the book value per share of common stock, divide the company's book value through the number of dazzling common stock shares.
The liquidation value and book value valuation methods are same, except that the liquidation method employs the market values of the assets and liabilities, not book values. The market values of the assets are the amounts the assets would earn on the open market if they were sold (or liquidated). The market values of liabilities are the amounts of money it would take to pay off the liabilities.
As it is depend on market values, the liquidation value method is more reliable than the book value method. Though, liquidation value is a worst-case valuation assessment. A company's common stock must be worth at least the amount generated per share at liquidation.