This document discusses various methods for valuing shares, including the intrinsic value method, earnings capitalization method (ECM), and dividend capitalization method. It also discusses calculating the normal rate of return and various risk factors. The fair value method is defined as the intrinsic value plus the ECM. Business valuation can be done based on the value of shares or discounted cash flows.

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Valuation Of Shares
Earning Capitalization
Method (ECM)
Dividend Capitalization
Method
Fair Value
Method
Fair Value = Intrinsic Value + ECM
2

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Calculation Of Value on Intrinsic Value Basis
Also Known as :
• Intrinsic Value
• Net Asset Value
• Break up Value
• Net Worth Per Share
• Book Value Per Share

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Valuation of Intrinsic Value :
Sundry Assets ----------
Less: Sundry Liability ----------
Add: Goodwill ( Revalued) ----------
Add: Non Trade Investment ----------
Less: Preference Share Capital and
Dividend in Arrear ----------
Add: Notional Calls ----------
Net Asset For ESH ======
Divided By No. of Shares ----------
Intrinsic Value ======

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Note: Goodwill will always be calculated for the purpose of
Intrinsic Value
Note: Sundry Asset and Liability are after :
Revaluation
Rectification
New Policy etc.
Note: Always Calculate Intrinsic Value on Ex Dividend
Basis.
Intrinsic Value = Int. Value + Div Per
Cum Dividend Ex Dividend Share

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1. Earning Yield Method /
Earning Capitalization Method / Yield Method
= Earning Rate × Paid Up Share Capital Per Share
NRR
Future Marketable - Non Trade Inv.
Profit Income Net of tax
Earning Rate = x
100
Share Capital
Use : Where large no. of shares is to be valued ( Big Lots)

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2. Dividend Capitalization Method
Dividend Rate x Paid up share cap per share
Normal Rate of return
• Dividend Rate is rate of Dividend Company is expected to
pay.
• Normal Dividend Rate is NRR.
• This method is applied for Small Lot of shares.

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3. Fair Value Method
Fair Value = Intrinsic Value + ECM
2
This method is to be used for valuation of
shares for controlling Interest.

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How to Calculate Normal Rate of Return
NRR of Industry is taken as Base ---------
Add: Risk Factor ½ % Assumed ---------
( Risk Premium for each risk)
Ke of Companies NRR
Risk Factors:
1. Dividend Track Record
2. Dividend Coverage Ratio
3. Asset Backing Ratio
4. Debt Equity / Capital Gearing Ratio

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Equity Dividend Coverage Ratio =
PAT – Preference Dividend with CDT
Equity Dividend
Preference Dividend Coverage Ratio =
PAT
Preference Dividend

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Asset Backing Ratio =
Intrinsic Value Per Share
Paid up value per Share
Capital Gearing Ration =
Debt + Preference Share Holder
Equity – Losses – Preference Share Holder
Debt Equity =
Debt
Equity

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4. Valuation of Business
It can be on the basis of:
1. Shares
2. Cash Flows
1. Value as per Share = Number of × Value of
Shares Shares
Value per share can be : MP , Intrinsic Value , Fair Value , ECM , DCM
2. Value of Business on Cash Flow Basis =
Cash flow of Business × Discount Factor