WFU Law School
Law & Valuation
3.4 Use of Financial Statements in Valuation

3.4.1 Book Value

Book value represents the the net worth (or equity) of the business -- assets minus liabilities -- as shown on the company's balance sheet. It is relatively easy to calculate, but provides a terribly deceptive picture of value. .Financial statements are based on historical cost and do not reflect how much somebody would pay for the assets, much less the ongoing business. Book value typically does not reflect goodwill' or of the company's earnings potential.

Liquidation value is the net amount remaining after a business is brought to an end, its assets are sold individually, and its creditors are paid. This value may be difficult to calculate if the business is large and has a sizable number of assets. Assets also are often worth more when valued based on their productive use in the context of a going concern, rather than when they are sold piecemeal.

Student paper

For an interesting paper that discusses the valuation of a sports franchise, see Christina Vogel, Valuation of a Sports Franchise.


Valuation by the book

Gustav Beerly owned 4% of the stock in Mid-City National Bank of Chicago, which was merged into a subsidiary of Mid-Citco, a merger that enabled the bank to operate as a bank holding company.

Beerly dissented from the merger and presented an appraisal by a private valuator of $743.77 per share. But the bank balked. After he and the bank could not agree on a neutral appraiser, Beerly requested the U.S. Treasury Department's Comptroller of Currency to appraise his shares pursuant to 12 U.S.C.S. § 215a(d). Why does he get an appraisal - doesn't he still hold 4% of the shares of the new holding company?

The Comptroller considered four methods to value Beerly's stock: book value, adjusted book value, market value, and investment value. The Comptroller averaged the adjusted book value and investment value, and fixed the fair value of Beerly's shares at $282.39 per share - which he considered too low.

What are each of these valuation techniques? Why did the Comptroller not use book value or market value?

Beerly sued in federal district court, which found in favor of the government. On appeal, the Seventh Circuit addressed a number of points, including whether adjusted book value could be a fair method of valution. (More>>)

Paskill Corp. v. Alcoma Corp (Del. 2000)

Both sides appealed the trial court's judgment in appellant shareholder's appraisal proceeding. The trial court erred as a matter of law in valuing appellee corporation because it relied upon the net asset value as the sole criterion for determining the fair value of appellee's stock. The trial court exacerbated that problem in calculating appellee's net asset value by deducting speculative future tax liabilities because that deduction was inconsistent with the theoretical nature of the liquidating value. The trial court correctly excluded speculative expenses associated with uncontemplated sales when it attempted to compute appellee's net asset value. Since the trial court's judgment was reversed, the issue relating to an award of compound interest was moot. On remand, the trial court was to ascertain the exact nature of appellee as an enterprise and determine appellee's fair value by an admissible valuation technique based on record evidence. (More>>)


3.4 Use of Financial Statements in Valuation

©2003 Professor Alan R. Palmiter

This page was last updated on: March 21, 2004