Modified Book Value
What Is Modified Book Value?
Modified book value is a valuation metric for determining a company's worth based on the current market value for its assets and liabilities. At the end of the day, modified book value changes the value of a company's assets and liabilities to reflect fair market value. Since assets are recorded at their original or historical cost, the refreshed fair market value of those assets could be very not the same as their historical costs. For instance, marketable securities held by a company might have a market value that is very not quite the same as their historical value.
Understanding Modified Book Value
The asset valuation approach of modified book value expects that the value of a company can be determined by assessing the value of its underlying assets. Before determining a company's modified book value, it's important to initially comprehend the company's book value. All the book value of a company is normally viewed as the value of its assets minus its debts and liabilities. At the end of the day, in the event that a company were to sell all that it claims and pay off its liabilities, the excess amount would be all its book value. Investors use book value as a measurement to determine in the event that a company is overvalued or undervalued.
Customarily, while determining book value, the value of the assets on a company's balance sheet is viewed as in the calculation. Be that as it may, from an accounting stance, the values of those assets are recorded based on their original purchase price, called historical cost. In reality, those asset values can vacillate over the long run and be very not the same as their historical cost.
For instance, land would be an asset that would almost certainly increase in value over the long run. Then again, manufacturing equipment would almost certainly diminish in value since mechanical advances could ultimately make it less significant or obsolete. Modified book value makes things a stride farther by computing the current value of the company's assets and liabilities to give a more state-of-the-art valuation.
Parts of Modified Book Value
The types of assets remembered for book value and modified book value calculations incorporate fixed assets, which are physical in nature or unmistakable, as well as intangible assets, which are not physical. Below are a few instances of a company's assets and liabilities.
Assets
Below are instances of substantial or fixed assets:
- Equipment
- Apparatus
- Industrial facilities and structures
- Vehicles
Below are instances of elusive assets:
- Patents, which address legal protection and ownership for a development
- [Intellectual Property](/intellectualproperty, for example, a company's trademark
- Copyrights
Liabilities
Liabilities are what a company owes, which can incorporate both short-term and long-term financial obligations. A few instances of liabilities include:
- Accounts payables, which address money owed to providers and merchants
- Dividends payable, which are cash payments to investors due in the short term
- Long-term debt, for example, money borrowed from a bank
- Pension benefits
At the point when Modified Book Value Is Used
Commonly, modified book value is utilized in situations when a company is facing bankruptcy or is in financial hardship. Creditors, like banks, could have outstanding loans out to the company. Accordingly, the bank might require refreshed values of the company's assets.
From that point, creditors can determine the liquidation value of the assets, which is the amount of money they would receive assuming they sold the entirety of the assets. In the event that the total asset value on a company's balance sheet is not exactly its total liabilities, the creditors would probably write off their outstanding loans to the company.
How Modified Book Value Is Determined
Modified book value endeavors to make a more realistic valuation of a company (versus book value) by getting the current (or fair) market value of the assets and liabilities. When the refreshed valuations are determined, modified book value is calculated by taking away the total fair market value of the company's assets minus the total fair market value of its liabilities.
As part of the modified book value approach, the asset values might should be adjusted to realistic expectations. Short-term assets, like cash, would currently be recorded at fair market value on the balance sheet. In any case, a company's accounts receivables, which addresses money owed to a company on credit from its customers for products previously sold, may should be discounted. For instance, outstanding accounts receivables that are over 90 days old may be discounted by a certain percentage, since it would be far-fetched the company could get compensated the full amount owed.
Albeit a few assets would have likely increased in value since they were purchased, like real estate, different assets, like vehicles, would probably be worth undeniably not exactly their historical cost. Technology, like PCs and software, would likewise possible have depreciated in value. When all of the fair market values of the assets and liabilities are all determined, modified book value can be calculated by taking away the two totals.
Advantages and Disadvantages of Modified Book Value
The advantage of the modified book value approach to valuation is that it includes a top to bottom examination of the business. The individual asset valuations can give a reasonable comprehension of where the business creates the best value. On the off chance that the valuations are higher due to the restated assets values, it can further develop the arranging system when a company is restructuring its debt for a creditor.
The major disadvantage to modified book value is the high cost associated with carrying out its calculation. Several specific appraisers might should be hired, and the cycle is undeniably additional tedious than the other valuation methods, for example, book value. Likewise, the average investor wouldn't approach the specific assets, nor their values, of a public corporation. Subsequently, it would be hard to make a fair market valuation of a company's assets and liabilities utilizing just the total amounts recorded on the company's balance sheet.
Alternate Ways to Value Companies
Businesses can be valued in more ways than one, including a portion of the methods below:
Market Capitalization
Market capitalization is calculated by duplicating the company's equity share price by its total number of shares outstanding.
Times Revenue Method
The times revenue method takes a surge of revenues created over a certain period of time and applies it to a multiplier, which relies upon the company's industry and economic environment.
Discounted Cash Flow
The discounted cash flow (DCF) method measures the expected cash flows from a company (like revenue) and factors in the cost of capital, like the cost of borrowing money.
Likewise, companies can hire firms that have practical experience in business valuations to determine a business' value for a number of purposes, including a merger or acquisition, shareholder transactions, estate planning, and financial reporting.
Highlights
- Modified book value is a measurement for determining a company's worth based on the current market value of its assets and liabilities.
- Since assets are recorded at their historical cost, the refreshed fair market value of the assets could be very unique.
- Subsequently, modified book value can give a more forward-thinking valuation of a company.
