Reading time: 5 minutes
Subscribe

Face Value: Definition and how is it calculated?

What does at face value mean?

Face value means the nominal value of a security. In the case of a stock, face value is the original price of the stock (the price listed on the certificate). For bonds, face value is known as the par value. It is the amount paid to the bondholder upon maturity.

How is face value calculated?

Face value is not calculated. Instead, it is determined when a company issues shares. Therefore, the face value depends on the capital the company wishes to raise. Face value is used to calculate the company’s stock accounting value. This appears in the balance sheet of a company.

Can Face value increase?

Yes. However, to increase the face value of shares, it is mandatory to obtain shareholders consent. On passing the shareholders resolution, altering the Capital Clause in the Memorandum of Association (MOA) and filing with the Registrars of Companies, a company can change its face value. Additionally, in the case where the company is listed, filing with the Stock exchange is also mandatory. Also, the company is required to issue new share certificates to existing shareholders instead of the old certificates. It is not very frequent that a company changes its face value. Hence the face value remains constant, until and unless a company decides to change it.

What is book value per share?

Book value per share is the value of a share as per the company’s books of account. It is the value of a share that is obtained by dividing the common equity by the number of outstanding shares. Book value per share indicated the company’s net asset value per share. Net asset value is total assets – total liabilities.

Book value per share = Net Asset / Total Number of shares

Or

Book value per share = Equity Share Capital + Reserves & Surplus / Total Number of share

Also, book value per share is the amount per share that the shareholders get if a company is liquidated. Additionally, change in book value per share can be seen in the company’s annual reports.

What is fair value investment?

Fair value is the price determined by the market. It is the sale price of an asset as decided by the buyer and seller. For example, a share price on the stock exchange is the fair value of the stock. The fair value of a share is subject to fluctuations. Therefore, based on the bid and ask prices, the fair value of a share is determined.

In accounting, fair value is the value at which assets and liabilities of a company are recorded in its books of accounts.

What are dividends and yields?

Dividends are the earnings a company distributes to its shareholders. Publicly listed companies pay dividends. The dividend yield is a measure of dividend pay-out in relation to a company’s share (market) price. Also, the dividend yield is expressed as a percentage. It is calculated by dividing the dividend by its share price. A higher dividend yield doesn’t indicate that the company is paying high dividends in relation to its share price. High dividend yield can also be a result of a declining share price of a company.

What does nominal value mean?

Nominal value has multiple definitions in finance. For stocks and bonds, it is the face value of an investment that is written in front of security. Nominal value remains constant and doesn’t change. On the other hand, there is the market value which keeps changing and is subject to market fluctuations.

In economics, the nominal value is the value of an asset without taking inflation, taxes, and premiums into consideration. In contrast to the nominal value, there is real value. Real value considers inflation, taxes and premiums. It is the actual value that would be realized.

What is face value and market value?

Face value of a security is the original cost of the security. Market value is the current price of the security in the capital market. Most of the time, face value is less than market value.

Face value is determined when a company first issued shares. Also, the face value remains constant. Market value is determined by the current performance of a company and the supply and demand for that stock. The market value keeps changing.

Difference between market value and share value is called a premium or a discount. If the face value is less than market value, the difference is the premium. It means the stock is trading at a premium. Suppose the face value is more than the market value. It means the stock is trading at a discount.

Let’s take an example of a share. Its face value is INR 10. Its current market price is INR 100. The share is trading at a premium of INR 90 in the stock market.

What is a good P E ratio?

PE ratio is a financial ratio that measures how much investors are willing to pay for one rupee of a company’s earnings. It is calculated by dividing the share price with the company’s earnings per share. A high PE can mean investors are willing to pay more for one rupee of a company’s earnings. It can also mean that investors are confident about the company’s future prospects.

A low PE can be an indication that the investor is getting more earnings for his/her investment. This makes the company with low PE a good deal. However, it can also mean the investors aren’t confident about the company’s future prospects.

One has to be very careful while comparing the PE ratios of different companies. Only companies from the same industry can be compared on the basis of PE ratio. Inter industry comparisons are not recommended when using the PE ratio to compare different companies.

Published on June 4, 2020

Reader Interactions