The main limitation in using book value per share for share valuation models is the potential difference between recorded value and market value for both assets and liabilities.

Question

Quizplus · Accepted Answer

Book value per share is calculated by dividing the total common stockholders' equity by the number of outstanding common shares. However, the book value of assets and liabilities may not reflect their true fair market value, especially if there have been significant changes in market conditions or if the company's accounting practices are not conservative. As a result, relying solely on book value per share can underestimate or overestimate the true value of a company's shares.

The Main Limitation in Using Book Value Per Share for Share