Saturday, February 15, 2003

Personal Finance

Book value essentially net assets


Questions and answers from the Your Money mailbag:

How do you figure the book value of a company?

A company's book value is another way of saying net assets, or assets minus liabilities. On a company's balance sheet, "shareholders' equity" represents book value.

Think of book value as what the company would sell for if liquidated - what it would generate after selling factories, property and inventory and paying its debts.

This is very different from market capitalization (or market cap), which measures the value of the still-running company and its ongoing profits.

Still, some investors use book value per share as a valuation tool, to help determine the fair price of a company's stock. A company trading close to book value is often considered to be trading at a bargain.

No such account

Can you tell me more about the pretax accounts that are permitted for use for college and now K-12?

Not really, because no such account exists.

You are likely combining features of two accounts used for college savings - a state-sponsored 529 plan and a Coverdell Education Savings Account.

The popular 529 plans have been getting a lot of attention because of new tax legislation that makes growth in those plans tax-free when used for eligible college expenses, such as tuition and fees.

Ohio's 529 plan is attractive because residents get a state tax deduction for contributions.

Contributions to a Coverdell Education Savings Account, however, are made after tax. Formerly called Education IRAs, they changed names with the same legislation that raised contribution limits from $500 a year a child to $2,000.

Qualified distributions from these plans are also tax-free, but can be spent on elementary and secondary school expenses - not just college.

Complicated investing

Should I let our adviser talk us into using covered calls?

Only if you understand them well enough to feel comfortable - and that's something few people can say about these complicated investments.

With a call option, you are selling someone else the right (but not the obligation) to buy your stock at a certain price. Say you have 100 shares of P&G, currently priced at $85 a share. If P&G falls or stays the same, you'll keep your stock and pocket the proceeds from selling the call.

But if P&G shares rise, then the call buyer can use the option to call away the stock - and you'll have to sell your P&G shares for $85 apiece even though they may be worth $100. You'll have proceeds from the option sale and the stock sale - but you'll be out any future gains and dividends from those shares.

Calls might work well in falling markets because you can keep your proceeds and your stock. But there's no guarantee the market isn't going to rebound - or that a buyer will pay enough for your call to make it worthwhile.

Contact Amy Higgins at 768-8373; e-mail; or 312 Elm St., Cincinnati 45202. She cannot reply to all individual questions.

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