Why is market value of equity preferred over book value in financial calculations?

• A. Market value is always higher than book value
• B. Book value does not reflect current value after issuance
• C. Market value includes historical costs
• D. There is no difference between the two

Answer: (B)

The preference for market value of equity over book value in financial calculations stems from the fact that market value reflects the current price at which a company's equity can be bought or sold in the marketplace. This value is dynamic and changes based on supply and demand, investor perceptions, and market conditions, making it a more accurate representation of what investors are willing to pay for the company's shares at any given time.

On the other hand, book value represents the original cost of the company's equity minus any depreciation or amortization, which may not take into account current market conditions or future growth prospects. This means that book value often lags behind actual market conditions, failing to capture the factors that influence investors' valuation of the company's shares today.

Consequently, using market value provides a more timely and relevant assessment for financial analysis, investment decisions, and comparisons across companies. These aspects highlight why market value is preferred in financial calculations and investor evaluations.