--%>
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 : Problem on raising new capital AB

    AB Corporation has 3 million shares of common stock selling at $19 each. It also contains $25 million in bonds with coupon rate of 8%, selling at par. AB requires $10 million in new capital that it can raise by selling stock at $18, or bonds at 9% interest. The expect

    		•
  • Q : Zero coupon bonds problem Shana wants

    Shana wants to purchase 5-year zero coupon bonds with a face value of $1,000. Her opportunity cost is 8.5 %. Supposing annual compounding, what would be the present market price of such bonds? (Round to the closest dollar.) (a) $1,023  (b) $665  (c) $890&nbs

    		•
  • Q : Calculating Super normal profit The

    The case study of an economic analysis is done for Schlumberger, oilfield Service Company.  They are No. 1 in terms of market caps, revenue and employees globally. When any references are used/outside sources (except for Schlumberger's annual reports and financia

    		•
  • Q : Define the term Stock Market crash

    Stock Market Crash was responsible for the Great Depression. Middle class families lost all their savings as they had gambled the market on margin.Those banks which were under the loan ofbrokers’ started removing money out of the savings account

    		•
  • Q : Who were the creators of uncertain

    Who were the creators of uncertain volatility model?

    		•
  • Q : Long-Term Financing Needed Long-Term

    Long-Term Financing Needed : - At year-end 2012, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2012 were $2.5 million, are expected to increase by 25% in 2013. Total ass

    		•
  • Q : Explain merits and demerits of standard

    Explain merits and demerits of standard market practice to find the volatility as a function of underlying.

    		•
  • Q : When the dividend shows real money The

    The dividend is the part of the net income which the company distributes to shareholders. When the dividend shows real money, the net income is also real money. Is it true?

    		•
  • Q : What is the current example of a value

    What is the current example of a value company and would you buy it as an investment. Why or why not?

    		•
  • Q : Bond Price Information What is Bond

    What is Bond Price Information: Answer: Corporate bond market is not considered to be much transparent as it trades predominantly over the counter and investors do n

    		•