Market value of assets | Stocks and bonds | Finance & Capital Markets | Khan Academy


In the last video, we saw that
if Ben’s Shoe Company’s stock prices are trading
at $21.50 per share, and if Ben’s Shoe Company
has 10,000 shares– and we saw that over here on the
left, if it had 10,000 shares. Actually both of the shoe
companies have 10,000 shares. Then the market is
essentially valuing the equity of Ben’s Shoe
Company at $215,000, even though the book value
of the equity was $135,000. What I want to do
in this video is think about what does
that mean, or how should we perceive
the market’s value of the assets of
Ben’s Shoe Company. Then we can also think
about Jason’s Shoe Company. So remember, assets are
equal to liabilities plus the shareholders’ equity. So if all of a sudden the market
value of the equity, the market capitalization for
Ben’s Shoe Company is $215,000, that’s the
equity part right over here, this is the equity. And the only liability
that Ben’s Shoe Company had was this $5,000 in
accounts payable. So let me show you
that right over here, he had this $5,000
in accounts payable, also depicted over there. So the only liability
is this $5,000. So the liabilities
plus the equity, in the case of Ben’s company,
is $215,000 plus $5,000. So this piece right
over here is $220,000. Now, you might remember
from previous videos that the book value of the
assets in Ben’s company are only $140,000. $20,000 of cash, $100,000
of inventory, $20,000– this isn’t equity, this
is equipment, I should call it–
$20,000 of equipment. So The question is,
what makes up the gap here, when we think about the
market value of the equity? Because remember, this piece
right here only adds up to $140,000. But our total assets– or
the market’s perception of the total assets
of the company– are essentially what
it’s willing to pay for the equity
plus the liability. So the market is saying that
Ben’s assets, the assets in that company,
are worth $220,000. So what makes the difference? And even better, let’s
assume that Ben has actually done a good job of
saying the market value of his inventory, the
market value of his equipment. Well, what the market’s
saying in this situation– and this is actually what
tends to happen in general, the market value of
a company’s equity tends to be higher than
the book value– is that this company has
some type of intangibles. Things that you really can’t put
a finger on, or touch, or feel, or hold. But it makes this company’s
assets– or this company has more than just
the sum of its parts. There’s more to this company
than just the equipment, the inventory, and the cash. It might be Ben’s
management expertise. It might be a certain way
they have of doing business. It might be a certain
location they have. It might be their assortment. Who knows what it has,
but the market is saying that the combination of this
plus all of the expertise and how the business
is organized means that it actually has more
assets than are on the books. And the same thing is true
of Jason’s company, when they assign a $120,000
market cap there. This is the $120,000 in
equity– market value of equity. He has another $105,000
in liabilities. So the market’s valuing
their equity plus liabilities at $225,000. Is that right? 120 plus 100 plus 5. So 225,000. So once again, they’re valuing
all of the assets at $225,000, because assets are
equal to liabilities– these are the liabilities
right here– plus equity. So once again,
you’re saying there’s something above and
beyond the $140,000 that makes this company special. And an interesting
thing to think about– and we’ll address it
in the next video– is which one is a
better deal, considering that these companies
are pretty similar?

Paul Whisler

8 Comments

  1. I read on this topic like 20 times in the past and it was always jibberishly confusing with a lot of formulas and "special" words.
    And only after your video i thought: "aaah that what it all was about!"
    Thank you very much!

  2. @bmwm3cs it means investors are in a panic to sell their stocks thinking the entire company is going bust and leaving them without any money. On the other hand if they are not going broke u can easily buy them up cheap and when the market stabilises again. You got some richer the easy way 😀

  3. Did you upload the next video that covered the better value of the two businesses?

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