Why can the book value and market value of a firm differ? In case market value o

Question

Why can the book value and market value of a firm differ? In case market value of assets is $1.2 million and book value of assets is $1 Million. Is this the type of company that your are likely to invest? Balance Sheet Zoeckler Mowing & Landscaping's year-end 2014 balance sheet lists current assets of $350,000, fixed assets of $550,800, current liabilities of $286,600, and long-term debt of $324,000. Calculate Zoeckler's total stockholders' equity. Income Statement The Fitness Studio, Inc.'s 2012 income statement lists the following income and expenses: EBIT = $500,000, interest expense = $60,000, and net income = $360,000. Calculate the 2012 taxes reported on the income statement. Corporate Taxes Hunt Taxidermy, Inc., is concerned about the taxes paid by the company in 2012. In addition to $42.4 million of taxable income, the firm received $2,000,000 of interest on state-issued bonds and $1,500,000 of dividends on common stock it owns in Oakdale Fashions, Inc. Calculate Hunt Taxidermy's tax liability, average tax rate, and marginal tax rate.

Explanation / Answer

1) The Book value of a firm is the historical value of its assets as recorded in its books of accounts, whereas the market value of a firm is the PV of its future earnings discounted at a rate appropriate to its risk class. Hence, both are different.

Yes, this is the type of company I would like to invest in; a company whose market value is higher than its book value.

2) Zoeckler's total stock holders equity = Total Assets - Total Liabilities                                                             = (350000+550800)-(286600+324000)= $290,200

3) Net Income = EBIT - Interest - Tax expense

or Tax expense = EBIT - Interest - Net income = 500000-60000-360000 = $80,000

4) Interest on the state-issued bonds is not taxable and the first 70 percent of the dividends received from Oakdale Fashions is not taxable.

Taxable income = $42,400,000 + (0.3)$1,500,000 = $42,850,000

Tax liability = $6,416,667 + 0.35 ($42,850,000 $18,333,333) = $14,997,500

Average tax rate = 14997500/42850000 = 35%

Marginal tax rate = 35% as for every $ additionally earned the tax rate is 35%

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