What is Book Value?
Book Value is the worth of an asset calculated by subtracting all liabilities associated with the asset from the historical cost.
Book Value Formula
Assets less Liabilities.
The problem is Assets includes, as stated, existing land & buildings, inventory, cash in the bank, etc. held by the company.
The problem in assuming you can sell off these assets and receive their listed value is that such values are accounting numbers, but otherwise pretty unrealistic.
Consider a company owning a 40 year old building in downtown Chicago. That building might have been depreciated fully and is carried on the books for $0, while having a resale value of millions. The book value grossly understates the sell-off value of the company.
On the other hand, consider a fast-changing industry with 4-year-old computer equipment which has a few more years to go before being fully depreciated, but that equipment couldn’t be sold for even 10 cents on the dollar. Here the book value overstates the sell-off value.
So consider book value to be assets less liabilities, which are just numbers, not real items. If you want to know how much a company should be sold off for, hire a good investment banker, which is often done on take-over bids.
Article Credits:
Contributed-By: Art Kamlet