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CS Executive · Corporate Accounting and Financial Management · Introduction to Financial Management

Shree Textiles Ltd has 10,00,000 equity shares outstanding and its shares trade at ₹85 each. Its net worth is ₹6,00,00,000. Treating wealth of shareholders as the market value of equity, what is the shareholders' wealth, and by how much does it exceed book net worth?

Shareholders' wealth is market capitalisation: 10,00,000 shares at ₹85 equals ₹8,50,00,000. Compared with the book net worth of ₹6,00,00,000, this is higher by ₹2,50,00,000. Wealth maximisation uses market value, not book value, as the measure.

  1. A₹8,50,00,000; excess ₹2,50,00,000Correct
  2. B₹6,00,00,000; excess nil
  3. C₹8,50,00,000; excess ₹85,00,000
  4. D₹2,50,00,000; excess ₹6,00,00,000

Explanation

Market value of equity = 10,00,000 × ₹85 = ₹8,50,00,000. Excess over book net worth = 8,50,00,000 − 6,00,00,000 = ₹2,50,00,000. Using book net worth as wealth gives ₹6 crore, which ignores market valuation and is wrong under the wealth maximisation view.

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