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Module 1 valuation of shares copy
- 1.
- 2. TYPES OF VALUESOF SHARES BOOK VALUE QUOTED VALUE FAIR MARKET VALUE INTRINSIC VALUE YIELD VALUE Face value of shares shown in balance sheet. Market value of share Average of values calculated on intrinsic value or yield value Value of shares based on amount of net assets per share Represents capitalised value of profits.
- 3. Meaning of Intrinsicvalue of company The intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value.
- 4. Need for valuationof shares 1. Estate duty purpose 2. Purchase or sale of controlling shares 3. Amalgamation 4. Valuation of assets of financing company 5. Security purpose 6. Conversion of shares from one class to another 7. Acquisition of shares by govt 8.Disinvestment of companies
- 5. MEANING OF VALUATIONOF SHARES Valuation of shares means the ascertainment of the value of shares which is independent of the price of shares quoted in the share market.
- 6. FACTORS AFFECTING VALUEOF SHARES INTERNAL FACTORS • Net worth of assets • Earning capacity of assets • Rate of dividend and its stability • Earning per share • Efficiency of management • Nature of the business EXTERNAL FACTORS • Economic condition of country • Political and social condition • International economic condition • International political condition • Demand and supply of shares • Economic policy of the govt
- 7. METHODS OF VALUATIONOF SHARES METHODS OF VALUATION OF SHARES NET ASSETS METHODS YIELD BASIS OTHERS Assets backing method Earning Yield Rate Of Return Dividend Yield Method Fair Value Price Earning Ratio
- 8. 1. Net Assets/IntrinsicValue/Break-up Value/Assets Backing Value Method Net assets backing method is the intrinsic value of the shares. It is calculated on the basis of net assets of the company. While calculating net assets it has been presumed that the company is liquidated.
- 9. ADVANTAGES OF ASSETSBACKING METHOD Advantages Useful when firm goes into liquidation It takes into account both tangible and intangible assets Considers real worth of the company Considers market value of the assets Facilitates easy valuation
- 10. DISADVANTAGES OF ASSETSBACKING METHOD Disadvantages Based on realizable value of assets which is difficult to calculate Based on hypothetical liquidation of company but company is going concern Does not consider earning capacity of company Does not consider normal rate of return and risk factor of market Considers goodwill which is difficult to calculate
- 11. PROFORMA FOR VALUATIONOF SHARES (NET ASSETS METHOD) PARTICULARS DETAILS AMOUNT Goodwill Investment (market value) Other assets TOTAL ASSETS (less) debenture accounts payable other liabilities TOTAL NET ASSETS (less) paid up value of preference share NET ASSETS AVAILABLE FOR EQUITY SHARE XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX VALUE PER SHARE • =NET ASSETS FOR EQUITY SHARES/ NUMBER OF EQUITY SHARES
- 12. EX-DIVIDEND & CUM-DIVIDEND-INTRODUCTION EX-DIVIDEND = WITHOUT DIVIDEND CUM-DIVIDEND = WITH DIVIDEND ANNOUNCEMENT DATE EX-DIV DATE RECOR D DATE PAYMENT DATE ANNOUNCEMENT DATE - The date when company announces that it is going to provide dividend RECORD DATE - The date when company shows the list of investors who have bought the shares of company. EX-DIVIDEND DATE – On the Ex-dividend date, the shareholder will not get any dividend for its share. PAYMENT DATE – The date on which dividend is paid to shareholders. SETTLEMENT PERIOD T+2 CUM - DIVIDEND EX-DIVIDEND
- 13. EX-DIVIDEND VALUE ANDCUM-DIVIDEND VALUE OF EQUITY SHARE According to Net Asset method, when proposed dividend is considered as an item of third party liability and is deducted from total assets in order to ascertain net assets. The value of share based on such net assets is known as ex-dividend value of share. When proposed dividend is not considered as an item of third party liability and is not deducted from total assets to determine net assets, value of share based on such net assets is called cum-dividend value of share
- 14. B. Yield orMarket Value method - Overview The word yield means earning of a firm in relation to investments. It means Availability of Profits per Equity Share. Based on Going Concern Concept. Types- 1. Earning yield method 2. Dividend yield method. Earning Yield Method- a. On the basis of expected rate of return b. On the basis of capitalisation of Profit. Dividend Yield Method – a. On the basis of Average rate of dividend. b. On the basis of Normal Rate of return
- 15. ATTENTION – IMPORTANTPOINTS 1. where information is given regarding Earning/Profits of the company along with normal rate of return, Earning Yield Method should be applied. 2. where information is given regarding Rate of Dividend of the company along with normal rate of return, Dividend Yield Method should be applied.
- 16. PRICE EARNING RATIO FORMULA TO CALCULATE PE Ratio PRICE EARNING RATIO = MARKET PRICE EARNING PER SHARE
- 17. Valuation of sharesbefore and after issuing Bonus Shares 10 million shares (2015) 20 million shares (2016) 2:1 bonus share Total shares = 10 mil + 20 mil = 30 million • Earning per share = Profit / No of share • = 60 mil / 10 mil = Rs 6 mil Before issuing Bonus share • Earning per share = Profit / No of share • = 60 mil / 30 mil = Rs 2 mil After issuing Bonus share Total profit (in year 2016) = 60 million 0 200000 400000 600000 2015 2016
- 18. FORMULA (valueof shares before bonus issue) Value of share = Net assets available to Equity Shareholders No. of Equity shares before bonus issue FORMULA (value of shares after bonus issue) Value of share = Net assets available to Equity Shareholders No. of Equity shares after bonus issue Valuation of shares before and after issuing Bonus Shares- Methods