g distinguish between the market value and book value of equity securities;

Question 1

Book Value of an Equity

Answer 1

The book value of equity is the value of the firm’s assets on the
balance sheet minus its liabilities.
• Book value goes up when the firm has positive net income and
retained earnings that flow into the equity account.

The book value of equity is the difference between the financial statement value of the firm’s assets and liabilities. Positive retained earnings increase the book value of equity. Book values reflect the firm’s past operating and financing choices.

Book value of equity is the company’s assets minus its liabilities. For a non-dividend paying firm, positive net income will increase the book value of equity. An increase in book value of equity may or may not increase the market value of equity.

he book value of equity is the balance sheet value of a firm’s assets minus its liabilities.

ncreasing book value is the primary goal of firm management. Increases in retained earnings increase book value.

Question 2

Market Value of an Equity

Answer 2

The market value of equity is the share price multiplied by the number of shares outstanding. Market value reflects investors’ expectations about the timing, amount, and risk of the firm’s future cash flows.

An increase in net income that does not meet investors’ prior expectations may decrease the market value of equity.

Market value of equity = Market price per share × shares outstanding = HK$312 × 200,000 = HK$62,400,000

The market value of equity reflects investor perception of the firm’s future value.

The market value of equity:
– Reflects the total value of a firm ‘s outstanding equity shares
based on market prices.
– Reflects the expectations of investors about the firm ‘s future
performance.
• Rare for book and market values to be the same