Can this be done on-time, non plagarized?

Review this week's reading from Tsang & Xydias: “Cheapest Stocks Since 1995 Show Cash Exceeds Market (Update5).” Under what circumstances would a company’s stock trade for less than the book value of its equity?

Sample:

Book Value literally means the value of the business according to its "books" or financial statements. In this case, book value is calculated from the balance sheet, and it is the difference between a company's total assets and total liabilities. Note that this is also the term for shareholders' equity. For example, if Company XYZ has total assets of $100 million and total liabilities of $80 million, the book value of the company is $20 million. In a very broad sense, this means that if the company sold off its assets and paid down its liabilities, the equity value or net worth of the business, would be $20 million. (Investopedia)

Market Value is the value of a company according to the stock market. Market value is calculated by multiplying a company's shares outstanding by its current market price. If Company XYZ has 1 million shares outstanding and each share trades for $50, then the company's market value is $50 million. Market value is most often the number analysts, newspapers and investors refer to when they mention the value of the business. (Investopedia)

The difference between market value and book value can depend on various factors such as the company's industry, the nature of a company's assets and liabilities, and the company's specific attributes. There are three basic generalizations about the relationships between book value and market value:

Book Value Greater Than Market Value: The financial market values the company for less than it’s stated value or net worth. When this is the case, it's usually because the market has lost confidence in the ability of the company's assets to generate future profits and cash flows. In other words, the market doesn't believe that the company is worth the value on its books. Value investors often like to seek out companies in this category in hopes that the market perception turns out to be incorrect. After all, the market is giving you the opportunity to buy a business for less than it’s stated net worth.

Market Value Greater Than Book Value: The market assigns a higher value to the company due to the earnings power of the company's assets. Nearly all consistently profitable companies will have market values greater than book values.

Book Value Equals Market Value: The market sees no compelling reason to believe the company's assets are better or worse than what is stated on the balance sheet. (Investopedia)

The price-to-book ratio measures a company's market price in relation to its book value. The ratio denotes how much equity investors are paying for each dollar in net assets. Book value, usually located on a company's balance sheet as "stockholder equity," represents the total amount that would be left over if the company liquidated all of its assets and repaid all of its liabilities.

Example- assume that the stock of Company XYZ is trading at $6 per share and there are 100 shares outstanding. And the book value is 500.

P/B ratio = Stock Price / Book Value per share

Book value:  (this is the same as owners' equity)

Book value per share:  500 / 100 = $5

P/B ratio = $6 / $5 = 1.2

Circumstances in which a stock trades less than book value

The company may have assets on its balance sheet that contribute heavily to its book value but would be hard to turn into cash. Goodwill is an 'asset' of sorts that appears on a set of accounts and contributes towards the book value, but is completely intangible. The company may have excessive goodwill through bad acquisitions which may not have much value in the future. If the company failed to amortize this goodwill u may have overvalued assets.

• There may be some claims on the assets which are hidden down in the footnotes.
• Outdated equipment may still add to the book value.
• Lack of investors’ confidence in the company’s future.
• If it is widely believed that the company's performance will deteriorate, its stock will possibly trade at a discount to its book value.
• Belief that the company is adopting aggressive accounting policies to bloat its net worth.

References

Investopedia.com

Moneystackexchange.com

www.quora.com

http://www.businesstoday.in/

http://www.investinganswers.com/