Adjusted Book Value - Explained
What is the Adjusted Book Value?
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Table of ContentsWhat is Adjusted Book Value?How is Adjusted Book Value Used?How to calculate the adjusted book valueExample of calculation of the adjusted book valueAcademic Research on Adjusted Book Value Method
What is Adjusted Book Value?
Book value is a valuation process in which the total assets that a company has are deducted from intangible assets and liabilities, it is also regarded as theoretical book value. An Adjusted Book Value is different from a theoretical book value, this valuation method measures the net value of a company after liabilities and assets have been adjusted to reflect fair market value. The adjustment done to liabilities and assets can either be to increase of reduce their values with the aim of showing their fair market value. An adjusted book value is otherwise called a modified book value.
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How is Adjusted Book Value Used?
Theoretical book value are realized when a company's assets are deducted from its liabilities and intangible assets. This value is realized by removing active from passive which accounts for the net value of a company. The adjusted book value is however different from the above valuation method, it accounts for extra accounting induces that are not captured in the theoretical book valuation method. When used as a business valuation method, the adjustment book value is one in which the value of assets and liabilities is increased or decreased to reflect their fair market value.
How to calculate the adjusted book value
The formula for calculating the adjusted book value is; Adjusted book value = adjusted asset - adjusted liability The word adjusted as used in this calculation can either increase or decrease. So, it is possible to have Adjusted book value = adjusted (increased) asset - adjusted (increased) liability or otherwise. Hence, there is no rigid formula in calculating the adjustment book value of a firm. Analysts determine the how the adjusted book value of a firm will be calculated. For example, an analyst can decrease the value of a firms liability if the value of the company's debts is lower than what is reflected in the balance and vice versa.
Example of calculation of the adjusted book value
The illustration below will give better clarification to how analysts calculate the adjusted book value of a firm. If the value of short-term investments a firm holds goes from $49,662,000 to $40,000,000 and has a net outstanding of $49,899,000 as against the $50,899,000 it had earlier. It also has an intangible asset that increase from a value of $2,149,000 to $5,350,000. The total assets however go from worth of $406,794,000 to the value of $399,333,000, the adjusted book value will be calculated as; Adjusted book value= 399,333,000 - 266,595,000 = 132,738,000.
Academic Research on Adjusted Book Value Method
- Company valuation methods. The most common errors in valuations, Fernndez, P. (2007). Research paper no, 449.
- The usefulness of earnings and book value for equity valuation in emerging capital markets: evidence from listed companies in the People's Republic of China, Bao, B. H., & Chow, L. (1999). Journal of International Financial Management & Accounting, 10(2), 85-104.
- Multiples used to estimate corporate value, Lie, E., & Lie, H. J. (2002). Financial Analysts Journal, 58(2), 44-54.
- Accounting-based valuation methods, determinants of market-to-book ratios, and implications for financial statement analysis, Bernard, V. L. (1994).
- The valuation of cash flow forecasts: An empirical analysis, Kaplan, S. N., & Ruback, R. S. (1995). The Journal of Finance, 50(4), 1059-1093.
- Combining earnings and book value in equity valuation, Penman, S. H. (1998). Contemporary Accounting Research, 15(3), 291-324. FiMIAM: financial method of intangible assets measurement, Rodov, I., & Leliaert, P. (2002). Journal of intellectual capital, 3(3), 323-336.
- Three residual income valuation methods and discounted cash flow valuation, Fernandez, P. (2002). SSRN WP, 296945.
- The value of corporate control and the comparable company method of valuation, Finnerty, J. D., & Emery, D. R. (2004). Financial Management, 91-99.
- Investigating market value and intellectual capital for S&P 500, Wang, J. C. (2008). Journal of intellectual capital, 9(4), 546-563.