Aswath Damodaran 315
Fallacies about Book Value
1. People will not lend on the basis of market value.
2. Book Value is more reliable than Market Value because it does not change as
much.
1. To those who would make this argument, I would ask: When you take a
second mortgage on your house, do you justify it to the bank using market or
book value? The proportion of market value that you are willing to lend might be
higher for some assets (with less volatile market value and higher current cash
flows) than for others.
2. The very fact that book value does not move very much, when we know the
true value does, is an indicator of the unreliability of book value.
3. From a cost of capital perspective, this is definitely not true (see next
overhead)
