--%>
Assignment Help - homework help

Difference between intrinsic value and book value

XYZ explained the difference between intrinsic value and book value in terms of the money spent on a college education. Please provide another example using a different simile.

E

Expert

Verified

Intrinsic value basically means a price a knowledgeable investor would be willing to pay for the concerned asset. Book value means the price at which an asset is recorded in the books of accounts. Book value may change due to various reasons such as revaluation of the assets which is in the control of the management but intrinsic value changes due to change in the market perception of the concerned asset. There may be many reasons for change in the market perception of the asset which may be good management, bright prospects of the sector etc.

In the given case, what XYZ meant is that today the book value of money spent on a college education can be low, but its intrinsic value may be quite high. Book value means the actual money spent on the education and intrinsic value means the present value of cash flows i.e, discounted cash flows which a student will get due to the increased salary of the student after say a couple of years say for e.g.  5 years.

Now for a similar situation....lets say that there is a real estate developer, who identified a plot of land in a sub – urban area and he is absolutely sure of huge development in the area in next 5-8years. The developer will buy the same plot of land at a very low cost, as the value of the land is low currently due to low development. He records the asset for say $100,000, which is its purchase cost. Now, the intrinsic value of the land may be too high as in the next 5 years there will be huge development around the particular area and the value of land will definitely shoot up manifold. Further, you can discount the high value you will get in the future and discount the same for a reasonable rate of return and the value of land may be more than $100,000. Alternatively, you may say that after 5 years, the value of the land may be more than $100,000 but its book value will be $100,000 only.

   Related Questions in Corporate Finance

  • Q : Relation between book value of shares

    Is the relation in between book value of shares or capitalization a good guide to investments?

    		•
  • Q : All rates are stated annually with

    1 Assume the following (all rates are stated annually with semiannual compounding) a. Six Month Spot Rate is 2% b. Six Month Forward rate starting at month six is 2.2% c. Six Month Forward rate starting at month 12 is 2.4% d. Six Month Forward rate starting at mont

    		•
  • Q : Determining Profitable purchasing ABC

    ABC Corporation is interested in purchasing a machine which will cost $50,000, and it will depreciate it on the straight-line basis over a 5-year period. The machine is predicted to last for 7 years and then Milan will sell it for $5,000. The expected earnings before

    		•
  • Q : What is the Free Cash Flow Is the Free

    Is the Free Cash Flow (FCF) the sum of the debt cash flow and the equity cash flow?

    		•
  • Q : Is Capital Cash Flow identical with

    Is Capital Cash Flow identical with Free Cash Flow?

    		•
  • Q : Define Strong form market efficiency

    Strong form market efficiency: Strong form market efficiency defines that the price of a security in the market replicates all information—public and also private or within information. Strong form efficiency

    		•
  • Q : Cost of Equity AB Corporation has 16%

    AB Corporation has 16% cost of equity, 35% tax rate, and debt-to-equity ratio of 30%. XY Corporation has 30% tax rate and debt-to-equity ratio of 40%. Both AB and XY are in the same business of selling automotive parts. If the riskless rate is 4% and the expected retu

    		•
  • Q : How you can predict future evolution of

    Could we suppose that, as we cannot predict the future evolution of the value of shares, a good estimation would be to consider this constant during the next five years?

    		•
  • Q : Explain usual value of the sales of net

    Does the usual value of the sales and of the net income of Spanish companies have anything to do along with sustainable growth?

    		•
  • Q : Define reasonable things that a company

    There are four methods a company can utilize the money this generates: a) Buying other assets or companies; b) Reducing debt of it; c) Distribute this to shareholders, and d) Increasing cash holdings of it.