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Compare and contrast the book value and liquidation value per share for common stock. Is one method more reliable? Explain.
The Book Value of a firm's common stock is institute by subtracting the value of the firm's liabilities and preferred stock if any, as mentioned on the balance sheet, as of the value of its assets. The result is the book value or else net worth of the company's common stock. To get the book value per share of common stock divides the company's book value by the number of outstanding common stock shares.
The book value and liquidation value valuation methods are similar, excluding that the liquidation method uses the market values of the liabilities and assets not book values. The market values of the assets are the amounts the assets would earn on the unlock market if they were sold (or liquidated). The market values of the liabilities are the amounts of funds it would take to pay off the liabilities.
Since it is on the basis of market values, the liquidation value method is more dependable than the book value method. But, liquidation value is a worst-case valuation assessment. A company's common stock should be worth at least the amount generated per share at liquidation.
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