Gino Verza

Trading Under Book Value

Just a corporate finance perspective:

Oversimplifying ----stock prices are low because of the the expectation that the Present Value of the future free cash flows (discounted at the weighted average cost of capital) generated by the assets will be lower than the initial investment amount (book value).

In other words, a price with a discount to book (other things being equal) means that the expected return from existing assets (book value) will be lower than the firm's weighted average cost of capital.

Oversimplifying ---regardless of the activity of the firm involved, a company with the expectation of insufficient free cash flow will exhibit a price with a discount to book.

MSFT has a relatively high price to book, because of the combination of free cash flow plus surplus cash on the balance sheet.