Book value approach Model in valuation

The book value approach model is a method of valuing a company based on its balance sheet. The book value of a company is the total value of its assets minus the total value of its liabilities.

To use the book value approach model, you would first calculate the book value per share of the company. Then, you would multiply the book value per share by a multiplier. The multiplier is a number that reflects the market’s valuation of similar companies.

For example, let’s say the book value per share of a company is $10 and the multiplier is 2. This would mean that the estimated value of the company is $20 per share.

The book value approach model is a simple and easy way to value a company. However, it is important to note that the model does not take into account the future growth potential of the company.

Here are some multiple choice questions (MCQs) on book value approach model:

  1. Which of the following is a book value approach model?
    • Dividend discount model (DDM)
    • Free cash flow to equity (FCFE) model
    • Gordon growth model
    • Book value per share
    • Answer: Book value per share
  2. Which of the following is the formula for book value per share?
    • Book value per share = Total assets / Number of shares outstanding
    • Book value per share = Total liabilities / Number of shares outstanding
    • Book value per share = Total assets – Total liabilities
    • Book value per share = Total liabilities – Number of shares outstanding
    • Answer: Book value per share = Total assets / Number of shares outstanding
  3. Which of the following is a limitation of book value approach model?
    • The model does not take into account the future growth potential of the company.
    • The model is based on the assumption that the company will be liquidated.
    • The model does not take into account the intangible assets of the company.
    • All of the above
    • Answer: All of the above

Answers:

  1. Book value per share
  2. Total assets / Number of shares outstanding
  3. All of the above

Here are some additional points about book value approach model:

  • The book value approach model is based on the assumption that the company will be liquidated.
  • The model does not take into account the intangible assets of the company.
  • The book value approach model is a simple and easy way to value a company, but it is not always accurate.