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Book Value vs Fair Market Value: What Drives Corporate Valuations
- Location: India
Understanding corporate valuation is essential for investors, analysts, and business leaders. Two key metrics used in valuation are Book Value and Fair Market Value, each offering different insights into a company’s worth.
Book Value refers to a company’s net asset value as recorded on the balance sheet—assets minus liabilities. It reflects the historical cost of assets and is used for accounting and reporting purposes. However, it may not represent the current market reality, especially for intangible assets like brand value or intellectual property.
In contrast, Fair Market Value represents the price a willing buyer would pay a willing seller in an open market. It is influenced by market demand, future earning potential, industry trends, and investor sentiment. This value is often used in mergers, acquisitions, and investment analysis.
While book value offers a conservative measure of a company’s financial base, fair market value provides a more dynamic, forward-looking perspective. Corporate valuations are often driven by a blend of both, depending on the context. Investors typically rely on fair market value for decision-making, but book value remains crucial for assessing a company’s fundamental stability. Understanding both helps paint a complete picture of a firm’s true financial health.
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