Answered: Assuming that both can be calculated…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Assuming that both can be calculated with reasonable accuracy, does book value or intrinsic value give a more accurate assessment of a
company’s value? Why?

Expert Solution

Answer

Intrinsic value is a more accrurate assessment as compared to book value assessment because,

Intrinsic value includes fair value or market value of assets and liabilities while book value approach considers book values only which are historical and are no longer useful in future decision making.

Intrinsic value captures the market sentiments of demand and supply forces.

Intrinsic value shows how much an asset should worth so that the investor can compare the market price with the intrinsic value so as to decide whether the asset is worth to buy or not.

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