Valuation of shares by Ruby Sharma

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Valuation of shares by Ruby Sharma

  1. 1. 1Ruby Sharma
  2. 2. NEED OR PURPOSE When two or more companiesamalgamate or one company absorbanother company. When a company has decided toundergo a process of reconstruction. When preference shares or debenturesare converted into equity shares. Under a scheme of nationalizationwhen the shares of a company aretaken over by the government.2Ruby Sharma
  3. 3. Contd……. Shares are often pledged as security forraising loans. The survivors of deceased person who getsome shares of company made by will. When shares are held by the partners jointly ina company and dissolution takes place., itbecomes necessary to value the shares forproper distribution of partnership propertyamong the partners. When shares are received as a gift, Todetermine the Gift Tax & Wealth Tax the valueof such shares will have to be ascertained.3Ruby Sharma
  4. 4. VALUES OF SHARESBook ValueFace ValueCost ValueFair ValueCapitalized ValueMarket Value4Ruby Sharma
  5. 5. Face Value A Company may divide its capital intoshares of @10 or @50 or @100 etc. Company’s share capital is shown as perFace Value of Shares. Face Value of Share = Share CapitalTotal No of Share This Face Value is printed on the sharecertificate. Share may be issued at less (or discount)or more (or premium) of face value.5Ruby Sharma
  6. 6. Book Value Book Value of Share =Book Value of CompanyTotal No. of SharesWhere,Book Value of Company =Share Capital+ Reserves+ Accumulated Profits– Accumulated Losses6Ruby Sharma
  7. 7. Intrinsic Value Intrinsic Value of Share =Net Assets of CompanyTotal No. of Shareswhere,Net Assets =Fixed Assets+ Current Assets+ Investments-Outside Liabilities with Debentures- Preference Share Capital7Ruby Sharma
  8. 8.  Capitalized Value of Share =Capitalized Value of ProfitTotal No. of Shares Fair Value of Share =Value of Share by NAV Method + Value of Share by Yield MethodTotal No. of Shares Cost Value :Price on which the shares arepurchased with purchase expenses such asBrokerage, Commission etc. Market Value :Price on which the shares arepurchased or sold. This value may be more or lessor equal than Face Value.8Ruby Sharma
  9. 9. METHODS OF VALUATIONNet AssetsValue (NAV)MethodDividend YieldMethodEarningCapacity(Capitalization)MethodAverage (FairValue) Method9Ruby Sharma
  10. 10. Net Assets Value (NAV) Method Aims to find out the possible value of shareat the time of liquidation of the company. It starts with the calculation of Market Valueof the company. Then amount paid off to Debentureholders, PreferenceShareholders, Creditors and otherLiabilities are deducted from the realizedamount of assets. The remaining amount is available forEquity Shareholders10Ruby Sharma
  11. 11. Net Assets Value (NAV) Method Intrinsic Value of Share = Net Assets ofCompany /Total No. of Equity SharesNET ASSETS =All Assets(except fictitious assets)- Outsider Liabilities- Preference share capital- Any Dividend in Arrears11Ruby Sharma
  12. 12. Precautions of NAV Method Market Value of the assets should betaken if given; or Book Value should be arrived at aftercharging adequate depreciation. Intangible Assets should be included inAssets, whether they are appearing in thebalance sheet or not. All Fictitious Assets must be ignored. Provision should be made for bad anddoubtful debts on amount of sundrydebtors.12Ruby Sharma
  13. 13. Precautions of NAV Method All Liabilities, whether appearing in thebalance sheet or not, must be taken intoaccount. Outstanding expenses and an appropriateamount of contingent liabilities must betaken into account. Adequate provision for taxation should bemade. The Claim of Preference Shareholdersmust also be deducted from the Net Assetsto ascertain the value of an Equity Share.13Ruby Sharma
  14. 14. Dividend Yield Method Investors are interested in income. They have to price of a share upon the sizeof expected dividends. Value of share is calculated by comparingthe Expected Rate of Dividend of acompany with Normal Rate of Dividend asprevailing in that industry. Value of Share =Expected Rate ofDividend X Paid UP Value of Share/Normal Rate of Dividend14Ruby Sharma
  15. 15. Dividend Yield Method Where , PROFIT AVAILABL for EQUITYSHARE HOLDERS =Profit of the Company- Income Tax- Transfer To Reserves- Transfer To Debenture Sinking Fund- Preference Dividend15Ruby Sharma
  16. 16. Earning Capacity(Capitalization) Method Based on the assumption that the companywill continue to operate the business. If a investor wish to obtain controllinginterest then the shares value is calculatedon the basis of Earnings rather thanDividend. Value of share is calculated by comparingthe Rate of Earnings of a company withNormal Rate of Return as prevailing in thatindustry.16Ruby Sharma
  17. 17. Earning Capacity(Capitalization) Method Value of Share = Rate of Earnings X PaidUP Value of Share Normal Rate of Return Earning Capacity (Capitalization) Methodwhere , RATE OF EARNINGS = PROFITEARNED = NET CAPITAL EMPLOYEDProfit Earned Profit of the Company FixedAssets at MV X 100 - Income Tax + CurrentAssets except Invest . Net CapitalEmployed + Interest on Debenture -Current Liabilities + Preference Dividend17Ruby Sharma
  18. 18. Average (Fair Value)Method Fair Value of Share =Value of Share byNAV Method + Value of Share by YieldMethod /Total No. of Shares18Ruby Sharma
  19. 19. 19Ruby Sharma

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