The Daily Technical #02

Good morning. Welcome to the second edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION

If the share price of a company increases by 10%, what is the balance sheet impact?

When tackling this question, start by clearly stating the main point: there's no direct impact on the balance sheet. This sets the stage for your explanation.

Next, dive into the crucial difference between share price and book value. Share price is market-driven and reflects the current perceived value of the company, while book value is based on historical cost and is shown on the balance sheet.

To make this concept more concrete, introduce a simple equation: Book Value of Equity = Total Assets - Total Liabilities. This helps visualize how book value is calculated and why it's not affected by market fluctuations.

If you’re feeling confident, you can use a real-world example. Apple is perfect for this. Mention how its book value is significantly lower than its market cap.

Why this approach? It shows you understand the core concept and can explain it simply. Plus, real-world examples make your answer more memorable and practical.

Common Mistakes:

1. Assuming share price directly affects the balance sheet. Share price is a market metric, not an accounting one. Always separate market value from book value in your mind.

2. Confusing equity value with book value of equity. They're different concepts with different purposes. Remember, one's for the market (equity value), one's for accounting (book value).

TL;DR:

• Share price changes don't directly impact the balance sheet.

• Book value ≠ Market value. One's historical, one's current.

• Real-world example: Successful companies often have market values above their book values.

TODAY’S QUESTION
What is goodwill and how is it created?

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