Book Value Approach

This approach uses the book value per share (BVPS) as the basis of valuation of shares. The BVPS is the equity capital plus reserves mill surplus) divided by the number of outstanding equity shares. Alternatively, the BVPS is the amount per share on the sale of the assets of the company at their exact book (accounting) value minus all liabilities including preference shares. Assuming total assets of Alert Ltd Rs 60 crore, total liabilities including preference shares of Rs 45 crore and 10,00,000 shares, us BVPS = (Rs 60 crore - Rs 45 crore) • 10,00,000 = Rs 150. Alternatively, assuming a net-worth of Rs 15 crore and reserves Rs 5 crore), the BVPS of Alert Ltd

= Rs 15 crore/ 10,00,000 = Rs 150

However, the BVPS is not a good proxy for true investment value. For one thing, this approach relies on historical balance sheet data. Moreover, it ignores the expected earning potential. Similarly, the BVPS has no true relationship to the market value of the firm.

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