Book value of equity:
The term book value of equity refers to the net worth of a business. It consists of the total assets of the business minus the total liabilities.
The book value of equity will change in the case of the following events:
- Changes in the company’s assets related to its liabilities.
- Depreciation: Equity will decrease.
- Issue of new equity in which the firm obtains new capital increases the total shareholders’ equity.
- Share repurchases in which a company gives back money to its investors, reducing on the asset side its financial assets, and on the liability side the shareholders’ equity. For Practical purposes, share repurchasing is similar to a dividend payment. Both consist of the company giving money back to investors. Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares in future income and distributions.Dividends paid out to preferred stock owners are considered an expense to be subtracted from net income.
- Other reasons – Assets and liabilities can change without any effect being measured in the Income Statement under certain circumstances; for example, changes in accounting rules may be applied retroactively. Sometimes assets bought and held in other countries get translated back into the reporting currency at different exchange rates, resulting in a changed value.