Valuation of Shares

 Valuation of Shares

Methods of Valuation of Shares

1. Net Assets Basis or Intrinsic Value or Assets Backing

2.. Earning Capacity or Yield Basis or Market Value

3. Fair Value Method or Dual Method

1. Net Assets Basis or Intrinsic Value or Assets Backing

Steps to Calculate "Amount Available to Equity Shareholders"

1. Fixed  Assets (Tangible and Intangible) to be considered at their Realizable Value.

    Note: Goodwill can be calculated on Super Profit Basis. If Purchased Goodwill appears in the
               books, it should be ignored and New Valuation should be done.

2. Inventories / Stock should be taken at Current Market Price

3. Fictitious assets such as Preliminary Expenses, P & L A/c (Dr. Balance), Etc. should be ignored

4. All unrecorded Assets and Liabilities should be considered

5. From the Total Assets All Outside Liabilities should be deducted.

6. Preference Share Capital including arrears of Dividend(if any) should be deducted

     Value of Each Equity Share = Amount Available to Equity Shareholders

                                                                  No. of Equity Shares

Note: If there are both Fully Paid-up and Partly Paid-up shares, Then, The uncalled amount on Partly Paid-up shares should be added to the Total Net Assets by way of Notional Call and Notionally Convert all Partly Paid Shares in Fully Paid Shares. To get the Value of Each Equity Share the Total Funds/Amount Available for Equity Shareholders should be divided by Total Equity Share (Fully Paid + Partly Paid).

2. Yield Basis or Earning Capacity or Market Value

Under this method the shares are valued based on the rate of return the shareholder earns on his investments. The Rate of Return can be Classified as 

        a) Rate of Dividend

        b) Rate of Earning.

     Valuation based on Rate of Dividends

     

     Value of Each Equity Share =     Dividends per Share    X 100

                                                          Normal Rate of Return

                                                  

                                    or             = Rate of Dividend (Expected)     X Paid up Value per Share 

                                                          Normal Rate of Return

     Valuation based on Rate of Earnings

     

     Value of Each Equity Share =     Expected Profits    X 100

                                                             Equity Capital 

 

                                    or             = Expected Rate of Return     X Paid up Value per Share 

                                                          Normal Rate of Return

     The value of each Equity Share can also be calculated under this method by Capitalization of
     Profits

     

     Capitalized Value of Profit =         Expected Profit           X 100

                                                         Normal Rate of Return 

     Value of Each Equity Share =   Capitalized Value of Profit  X 100

                                                           Number of Equity Shares 

3. Fair Value Method or Dual Method

     There is no specific formula for calculation of Value of Shares under this method this is just a       
     simple average of Intrinsic Value and Yield Basis.