Book Value and Intrinsic Value

Book value refers to the total value of the assets which is less the value of the total liabilities. The book value useful in measuring the value of a firm asset which has accumulated until the present time. Theoretically, the book value is to determine the amount to be received by shareholders of a firm in case the firm becomes liquidated.  For instance, a firm may have $23 million assets and $ 20 million liabilities; this implies that the book value of this firm will be # million.  Liquidation value refers to the prices of substantial tangible assets when the firm plans to go out of the business and also needs to liquidate the assets within a limited period.  Thus, the liquidation value is far much less than the market value thus exposing the investors to the open market. When calculating the liquidation value, intangible assets such as goodwill and reputations are not included (Shleifer & Vishny, 2003).  The market price refers to the most probable price at which the fixed assets can bring in a competitive market at a fair amount.  The market value is used in calculating what the knowledgeable and interested buyers would be willing to pay for the assets assuming the substantial assets are not exposed to a competitive market. The market value of the company needs to behave fair valuation and accurate as it can be used in the financial reporting of a firm.

Intrinsic value refers to the actual value of firm assets as opposed to the market value of the asset.  The intrinsic value is perceived as a fundamental value as it includes different variable such as patent, copyrights, brand name and the model of the firm.  The intrinsic  value tends to be more subjective to half market value as different investors use different approaches of calculating the intrinsic value.   The intrinsic value further measures the value of the total assets of a firm and how these assets are expected to accumulate prices in future.  The intrinsic value can be calculated by taking the present value of the asset earnings which a firm anticipates generating in the future alongside the sales of firm assets.  For example,  we can assume the firm will create $2000 before selling it at $ 4,000. In this case, the intrinsic value of the company will be $6,000 at the end of a financial year.   In determining the economic or the intrinsic value of an asset, the investor would require fundamental analysis essential in determining whether the stock is overvalued, undervalued or whether the stock is trading at fair market prices.  The discounting model can be involved in choosing the anticipated cash flows at discounted rates.  The economic value of the asset can also be calculated by determining the fress cash-flow of equity as well as their stability (Brown & Cliff, 2005). Identifying the free-cash-flow of the assets can help in determining whether the firm assets will remain stable after rapid changes.

The concepts of book value, liquidation value, intrinsic value, and market value can be useful to Saudi Arabia leaders to determine the present prices of shares for different assets which can be invested to realize more earnings by vision 2030. Also, the concepts are essential for Saudi Leaders in determining the valuation of firm assets at different periods for instance when liquidating the assets or when the firm plans to invest in bonds in accordance to the growth model of vision 2030.



Shleifer, A., & Vishny, R. W. (2003). Stock market driven acquisitions. Journal of financial Economics70(3), 295-311.

Brown, G. W., & Cliff, M. T. (2005). Investor sentiment and asset valuation. The Journal of Business78(2), 405-440.