Accounting Valuation

finance a la shmoop. what's the difference between market value and book

value? ever tried to sell sunscreen to a white Walker? yeah [zombie walks through snow]

probably won't make much money. want to know why? now learning about the

difference between market value and book value will tell it all. first market

value it's what the market thinks a stock or a bond or a home or a used car

or whatever is worth. the market the crowd the crazy people.

all right here's an example of market value gone wild in the 17th century [crowd then tulip pictured]

Denmark, they valued a single tulip at 10 grand and it didn't even give them a

triple espresso buzz. go figure. but that's how the market of buyers

valued that tulip so that's what that tulips market value was. that's what the

market said it was worth. Book value however is a completely different in a [man walks through art gallery]

somewhat more rational animal .book value is the dollar amount that a company can

point to which reflects an asset they physically own. imagine buying a tractor

factory for 80 million bucks. it depreciates in value 10 million dollars

a year for 4 years then depreciates that 2 million dollars a year after that. so

after five years that factories Book value ie the amount we're guessing its [chart showing depreciation]

value as actually being is 38 million dollars. but lo and behold the factory

itself is made of Valyrian steel .you know that stuff from Game of Thrones

that kills White Walkers. so after eight years and one white Walker invasion of

Chicago later you decide to sell the factory itself because well the stuff [zombies walk in front of skyscrapers]

it's built out of, that rare material, is suddenly worth a lot more than the

factory .now after eight years the book value of the factory might be 32 million

dollars, but some bitter on eBay of tractor companies offers you a hundred

million bucks! and you accept! that hundred million dollars was the market [man sits behind computer screen]

value of the tractor factory even though the book value said it was worth a whole

lot less. securities actually work the same way. they are traded regularly in a

market place and they reflect their market value even though the book value

at which they are held is often a lot less. and what about Chicago well let's [smiling man carries bags of cash]

just say no one's selling much sunscreen these days.