I'm reading becker's financial text on pg f1-44 (more specifically part II. A. #6) about FV terminology, and it states "fair value does NOT include transaction costs", however I'm confussed by the Illustration presented on the very next pg, f1-45, which shows a table with stock prices for Foxy Co. and transaction costs as follows:

Exchange........Quoted Stock price.....Transaction costs.....net

New York.....................$52...........................($6). .............$46

London........................$50........................... ($2)..............$48

asking: "what is the FV of Foxy Cost if NY is the principal market?" the book's answer is $52.

My answer was $46 bc i thought FV does not include transaction costs. Why is my logic wrong though? is it that transaction costs should not be ignored in measuring fv from the principal market?

what about this question "if no principal mkt, with London's price (net of transaction costs) having the most advantageous result...is $50" not $48 as i thought. Again, for FV i ignored transaction costs. Between NY and London, selling (my) Foxy Co. stock would give me the highest return, but what I want to know is why would I use $50 as the FV on my B/S instead of $48....again, shouldn't FV ignore transaction costs?  

The answer to the question is to ignore the transaction costs...

F1-45 "The most advantageous market is the market with the best price for the asset or liability, after considering transaction costs.  Note that although transaction costs are used to determine the most advantageous market, transaction costs are not included in the final fair value measurement..."

so, the answer to why is that final fair value does not include transaction costs

 Hi MARBNYC

on F1-44 A.6 its given "FV doesnt include transaction costs(Tc)", which means dont consider Tc for measuring FV ( dont deduct those costs from FV)

on F1 - 45 E. its given in note[ although the Tc used to determine the most advantageous market, tc are not included(in other terms not  deducted ) in final FV measurement]

So in the illustration .. here " quoted stock price " which is considered to be FV doesnt include Tc and we shoudnt deduct Tc from that price. but still v consider Tc for finding out the most advantageous market.

preethis wrote:  " quoted stock price " which is considered to be FV doesnt include Tc and we shoudnt deduct Tc from that price.

This is what i get from reading; quoted stock price = fv. Then you mentioned FV doesnt include tc. To not include something doesn't it translate into deducting it or not counting it in? well, as you can see the NY quoted price is $52 including $6 of tc...do we ever use the NET amounts?

thank you guys for you comments, im sure ill nail it sooner or later :)

the only way i can understand this is as follows:

Exchange........Quoted Stock price.....*Transaction costs.....**net

New York.....................$52...........................($6). ..................$46

London........................$50........................... ($2)...................$48

**can also be seen as the GP

**can also be seen as COGS

(1) if the question states NY is the principal market, then $52, the quoted price for the stock, is also the stocks' FV. SImilarly, if London is said to be the principal market, then the quoted price $50 is also its FV. Additionally pg f1-44 states FV is an exit price, which is the price to sell an asset or liability. With that in mind, as the seller of the stock, i will sell my stock for the same amount all other foxy stocks, as mine, are selling in the principal market; the quoted price. If NY is the principal mkt my exit or selling price will be $52, if London, then $50.

(2) In the event that there is no principal market for the stock im trying to sell, i will have to assess which is the most advantageous market, and that would  be the place where i can get the best price TO SELL my stock. how do you know you are opting for the most advantageous market to sell? two important things to keep in mind, 1st, the price will allow me to get the most $$ back for my stock; 2nd, at the least cost to me.

So...if there was no principal market for foxy stock, the most advantageous market would be London. Why not NY? not NY because in MEASURING or ASSESSING the most advantagous market to sell my foxy stock, i have to consider the selling expense; Transaction Costs.

Although London's FV is $50, the expense is only $2 and in turn my profit is $48,

whereas the FV for NY $52 might seem better at a first glance, but the expense (selling cost to me) is $6 and that causes my profit to go down :( to $46.

:) so now i know selling my foxy stock in London will give me a greater return, a whooping $48. And if im asked what is the FV, that is the quoted price, $50, its FV.

picking a FV is easy bc it's given, but choosing the FV from the most advantageous market is what requires accounting how much will it cost me to sell (transaction costs) and how much of it will i truly keep (net amount).