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01 imcost class presentation valuation of shares


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Valuation of Shares presentaion

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01 imcost class presentation valuation of shares

  1. 1. CA. Mandar Joshi Valuation of Shares
  2. 2. Circumstances where Valuation of Shares is essential for decision making  Sale of shares by one person to another  Mergers, acquisitions & capital restructuring  Purchase & sale of shares in private companies and other unquoted shares  Valuation of shares for tax purpose e.g. gift tax, wealth tax  When shares are pledged as collateral for a loan  Determining the amount payable to the dissenting shareholders under section 494 of the companies act, 1956  Compensating the shareholders when the undertaking is nationalised  Valuation of shares by an investment company
  3. 3. Need for Valuation of Shares For the shares not listed on stock exchange • That is, where ready made market value of shares is not available For the listed shares where there is no transaction • No takers for the shares of the company Market quotation of shares may not show true valuation • Artificially Inflated market value of share • Volatile capital market conditions showing inaccurate market price Valuation Statutorily required • Valuation of Shares required in instance of liquidation of company
  4. 4. Methods of Valuation of Shares • Net Asset Method/ Intrinsic Value method/ Balance Sheet Method Asset Based Valuation • Yield Method Profit Based Method • Fair Value Method Asset & Profit Based Method • Price Earning Multiple • Book Value Multiple Market Price Approach Method • Discounted Cash Flow MethodOther Method
  5. 5. Net Assets Method - Suitability SUITABILITY OF NET ASSETS METHOD Amalgamation Sick Companies (Revivals or liquidation) Unquoted Equity Shares forming part of wealth (Where market value is not readily available) Lenders (when shares are pledged as security against loan)
  6. 6. Net Assets Method – Steps to solve the question • Net Assets for Equity Share Holders (Total Assets – Outside Liabilities) Step 1 • Calculate total number of shares outstanding in the market Step 2 • Calculate value per share: Step 1/ Step 2 Step 3
  7. 7. Net Assets Method  Step 1 – Calculation of Net Assets for Equity Share Holders (NA for ESH)  Step 2 – Value Per Share (VPS)  NA for ESH / Total no. of Equity Share Closing Capital Employed (Assets excluding Goodwill – Outside Liabilities excluding Preference Capital) XXX (Based on revised value of assets and liabilities) Less: Proposed Dividend (XXX) Add: Goodwill as per valuation XXX Total (A) XXX Less: Amount due to Preference Share Holders Preference Share Capital XXX Premium on redemption of Pref Capital XXX Unpaid Preference Dividend XXX Total (B) XXX (A - B) XXX Add: Notional Calls for Partly Paid up Capital XXX NA for ESH XXX
  8. 8. Net Assets Method  Valuation of Goodwill  Valuation of goodwill is an essential and integrated part of the valuation of shares  Goodwill valuation implies that how much potential value company is holding at the time of valuation of shares (Always start the solution with calculation of goodwill) Steps to calculate goodwill Step 1 Adusted Profits for the past years (Future Maintainable Profit) Step 2 Average Adjusted Future Maintainable Profits Step 3 Calculation of normal profits Normal Profits = Capital Employed X Normal Rate of Return Step 4 Super Profits = Adjusted Average Profits - Normal Profits (Step 2 - Step 3) Step 5 Goodwill = Super Profits X No. of years considered for goodwill
  9. 9. Solution: Step 1: Calculation of Net Assets for Equity Shareholders a) Calculation fo Goodwill i) Future Maintainable Profits Particulars 2010-11 2011-12 2012-13 2013-14 Rs. Rs. Rs. Rs. Profit as per books 18,00,000 20,50,000 23,00,000 24,50,000 Add: Capital Expenditure of machinery charged to revenue 2,00,000 Less: Depreciation on Machinery for 3 years on reducing balance method 20,000 18,000 16,200 Adjusted for overvaluation of stock 1,00,000 Adjusted for Bad Debts 20,000 Adjusted Future Maintainable Profits 18,00,000 22,30,000 22,82,000 23,13,800 ii) Average Adjusted Future Maintainable Profits = 18,00,000 + 22,30,000 + 22,82,000 + 23,13,800 4 = 21,56,450
  10. 10. iii) Calculation of Normal Profit Normal Profit = Capital Employed X Return on capital iv) Calculation of Capital Employed Particulars Rs Rs Assets Fixed Assets Building 24,00,000 Machinery 22,00,000 (Consider machinery newly included) WDV of Machinery newly included Gross Value 2,00,000 Less: Accumulated Depreciation for 3 years 54,200 1,45,800 23,45,800 Furniture 10,00,000 Vehicle 18,00,000 Total Fixed Assets 75,45,800 Add: 30% Increase in the value of FA 22,63,740 Total Revalued FA 98,09,540 Current Assets Investment 16,00,000 Stock 11,00,000 Less: Overvauation 1,00,000 10,00,000 Debtors 18,00,000 Less: Bad Debts 20,000 17,80,000 Bank Balance 3,20,000 Total Revalued Current Assets 47,00,000 Total Assets (A) 1,45,09,540 Less: Outside Liabilities Bank Loan - Secured Against Fixed Assets 12,00,000 Bills Payable 6,00,000 Creditors 31,00,000 Total Liabilities (B) 49,00,000 Capital Employed/ Net Worth 96,09,540
  11. 11. v) Calculation of Normal Profit Capital Employed/ Net Worth 96,09,540 Rate of return on capital 20% Normal Profit 19,21,908 vi) Calculation of Super Profit =Average Adjusted Future Maintainable Profit - Normal Profit =2156450 - 1921908 Super Profit = 2,34,542 vii) Goodwill (Two years purchase of Super Profit) =2,34,542 X 2 Goodwill = 4,69,084 Step 2: Net Assets for Equity Share Holders Particulars Rs Rs Closing Capital Employed 96,09,540 Goodwill (As revalued) 4,69,084 1,00,78,624 Less: Preference Share Capital 20,00,000 Net Assets for Equity Share Holders 80,78,624 Step 3: Value per share Value per share = NA for ESH / No. of equity shares = 80,78,624 / 4,00,000 Value per Share Rs. 20.20
  12. 12. Yield Method SUITABILITY OF YIELD METHOD Use for valuation of small companies Investors – More interested in Yield, i.e., Dividend or Earnings
  13. 13. Yield Method – Steps to Solve the Question  Future Maintainable Profits for Equity Shareholders  Expected Yield (Percentage given in the question)  Capitalised Value of FMP =FMP for ESH X 100/ Expected Yield  Value Per Share = Capitalised Value of FMP / No. of equity shares
  14. 14. Fair Value Method  Purely theoretical method of valuation  Compromised formula fixing the value of the shares as average of Net Assets Method and Yield Method  Fair Value = NA Method Value + Yield Method Value 2