The Market Value Versus Book Value Essay

Questions:

1. Analyze Visa’s income and expenditure.
2. How is marketing accounted for at Visa Inc.?
3. Explain Visa Inc.’s balance sheet.
4. What is the relationship between book value and market value?
5. How should we value brands? What are the challenges?
6. What is the impact of accounting decisions on the ratios?

Answers:

1. Analyze Visa’s income and expenditure.

What is the primary source of Visa’s revenues? Who is it specifically (banks? Customers? Stores?)

Service Revenue segment is the primary source of Visa’s Revenue. It is provided that Visa earns its revenue by providing resources as well as information amongst the banks, customer, merchant and collecting the fee on the basis of number or dollar value of transaction which it process. Banks are specifically more revenue generator in comparison to others (Visa (V). (2016)

Which source of revenue has the highest growth rate (2009 to 2013)

On the basis of available data it has been clearly indicated that Data processing revenue has higher growth rate (2009- 2013) approx 91%

While Visa’s business model is described as a technology payments company, Visa Inc. does not fall under the typical definition of a technology company. What is the largest category of expense on its P&L?

Even though Visa’s business Model is described as a technology payment company, “Personnel expenses” is considered as a largest category of expense as mention in the P&L Account.

Other observations re Visa’s income and expenditures

In regard to other expenses, there is decrease in the marketing expense since 2009 which states that good sign for the company. Administrative expenses are same as 2012 means there are some management in the expenses. At the end increase on other expense is implied due to inflation from year to year

2. How is marketing accounted for at Visa Inc.?

Does the income statement fairly value the impact of the marketing expense? If not, where does the value from the marketing expense show up?

In my opinion, marketing expenses as mentioned in the P &L Account is the fair value because Visa being brand has achieved its maximum market however it is required to market the same /services etc. Hence market expense will be there all the time (Visa (V). (2016)

Other thoughts?

No other thought.

3. Explain Visa Inc.’s balance sheet.

What has visa been doing with its earnings … particularly in 2013

On the basis of annual reports, it is clear that Visa uses it’s earning for payment of dividend repurchase of Class A common stock. However, in 2013 it has been observed that large amount has been paid by Visa to repurchase of Class A common stock.

What type of asset carries most of Visa’s book value? How does this differ from a manufacturing company?

“Good will” seems to be an asset carries most of Visa’s Book value.

Other observations?

In regard to other elements, there is decrease in current liabilities which show good performance of the VISA

4. That is the relationship between book value and market value?

Is the market to book ratio growing?

Yes, as pr the scenario given it clearly indicates that market to book ratio is growing

Why is the market value greater than the book value?

Book value means value of the business in accordance with the financial statement it is calculated from the balance sheet however, market value means the price in accordance with the prevailing market or stock market for (shares Gad, S. (2013).

5. How should we value brands? What are the challenges?

Does it appear that the valuation of the brand is an exact science? What was the range of valuations from the agencies that estimate the value of the brand?

Yes, it is appearing that the valuation is an exact science. Further, renege of valuation can be as follows:

Comparing of the DCF Value for the firm along with intangible with the firm without 1. Assuming that all the excess returns are due to the intangibles 2. Comparing the multiples where the firm trades to the sector averages.

6. What is the impact of accounting decisions on the ratios?

Marketing expenses are expensed on the income statement as they are incurred but the benefit is more like a capital expense … something that has a long term impact in strengthening the brand. If you treated it at a long term investment likes plant and equipment not as a short term expense …

What would be the impact in the income statement?

Impact on income statement if marketing expense is treated as assets

Profit will increase by the amount of marketing expense such as in 2013 profit would increase by$876

Depreciation will increase according to the rate of depreciation

Balance sheet?

Impact on Balance Sheet if marketing expense is treated as assets

Amount of Non Current Assets would increase after deduction of depreciation on the relevant price

Which ratios would be impacted?

Ans. Following ration would be impacted due to the mentioned changes

  • ROIC
  • ROE
  • Total Asset Turnover
  • ROA

References

Gad, S. (2013). The Market Value Versus Book Value | Investopedia. Investopedia. Retrieved 23 March 2016, from

Stock:Visa (V). (2016). Wikinvest.com. Retrieved 23 March 2016, from

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