Book Value And Market Value Of Debt

Following are two possibilities if debt is not liquid.

Book value and market value of debt. The market value is the value of a company according to the markets. In each you are using market value of debt but it happens to be the same as book value. The simplest way to estimate the market value of debt is to convert the book value of debt in market value of debt by assuming the total debt as a single coupon bond with a coupon equal to the value of interest expenses on the total debt and the maturity equal to the weighted average maturity of the debt.

What is market value of debt. The book value of debt is the amount the company owes as recorded in the books. In figure 2 this ratio ranges from 71 to 108.

The market value of debt refers to the market price investors would be willing to buy a company s debt for which differs from the book value on the balance sheet. We will discuss the difference between book value wacc and market value weights and why market value weights are preferred over book value weights. Book value is the net value of a firm s assets found on its balance sheet and it is roughly equal to the total amount all shareholders would get if they liquidated the company.

Weighted average cost of capital wacc is defined as the weighted average of cost of each component of capital equity debt preference shares etc where the weights used are target capital structure weights expressed in terms of market values. When you re considering investing in a company or loaning it money the book value of debt is one of the things to look at. Therefore if the market value of the debt is 1 000 000 the interest expenses are 60 000 and the maturity is 5 years and the current cost of debt is 8 then the market value of debt is.

Our sample covers a period in which the market does not often exceed the book value of debt. Book value is the net assets value of the company and is calculated as the sum of total assets minus the amount of intangible assets and is always equal to the carrying value of assets on the balance sheet while market value as the name suggests that the value of the assets that we will receive if we plan to sell it today. Figure 2 plots the average level across industries of book and market debt both normalized relative to january 1978 values along with the ratio of market to book debt.

If the book value is 10 percent of the company s worth it s a better prospect than if debt equals 80 percent of the assets. A company s debt doesn t always come in the form of publicly traded bonds which have a specified market value. Difference between book value and market value.