The Klingon Corporation has fixed assets with a book value of $700 and an appraised market value of about $1,000. Net working capital is $400 on the books,

Question

The Klingon Corporation has fixed assets with a book value of $700 and an appraised market value of about $1,000. Net working capital is $400 on the books, but approximately $600 would be realized if all the current accounts were liquidated. Klingon has $500 in longterm debt, both book value and market value. What is the book value of the equity? What is the market value?

Accepted Answer

We can construct two simplified balance sheets, one in accounting (book value) terms and one in economic (market value) terms:

KLINGON CORPORATION
Balance Sheets
Market Value versus Book Value

Market	Book		Market	Book
Liabilities and Shareholders’ Equity			Assets
$500	$500	Long-term debt	$600	$400	Net working capital
[latex]\underline{1,100}[/latex]	[latex]\underline{600}[/latex]	Shareholders’ equity	[latex]\underline{1,000}[/latex]	[latex]\underline{700}[/latex]	Net fixed assets
[latex]\underline{\underline{\$1,600}}[/latex]	[latex]\underline{\underline{\$1,100}}[/latex]		[latex]\underline{\underline{\$1,600}}[/latex]	[latex]\underline{\underline{\$1,100}}[/latex]

Question 2.2: The Klingon Corporation has fixed assets with a book value o...

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