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The disparity between a firms market value and book value can cause cruicial effects. Normally, the value of a firms equity determined by the market should go in parity with the value from accounting records or book value. But practically, there may be evident disparities between market value and book value and this situation raises the questions of why these differences occur.
There are many evaluation methods followed and the most relevant of them are the evaluation based on the Economic Value Added (EVA) which is Net Operating Profit Minus Adjusted Taxes reduced by (Invested Capital*Cost of Capital). This method takes into account the opportunity costs of capital. EVA too suffers from the drawbacks as from accounting.
Another theory, Shareholder value theory suggests that through the interests of the stake holders, the shareholder value can be reaped. This is for ensuring return satisfaction to all the interested parties in the long run. The stakeholder theory aims at a collective interest of all stakeholders or sees the realization of their goals as the ultimate objective. Double value creation system is also followed where a company increases its customer value through its operations as well as creates its shareholder value through the sale of its produce. Thus, it could be noted that the company value could be increased only if both the shareholders and stakeholders interest are considered simultaneously while doing the performance evaluation.
Present Value of Abnormal Earnings (PVAE), which will b ...
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