Valuation of shares : meaning , need of valuation of shares,method and types

 Need of valuation of shares:

The value of every share is printed in front of the share (certificate) search a value is called face value of the share the actual price maybe different and their force it becomes necessary to value the share on money accasions such as  

1. Sale or purchase for share of company whoess share a not quoted on the stock exchange
2. Went to or more companies Amalgamate or one company absorb another company
3. When a company has decided to undergo a process of reconstruction
4. When purchaser Aquarius majority of share of limited company
5. If lawn is to be reised on the security of share
6. Conversion of one class of share into another class
7. For taxation purpose e.g gift tax wealth tax act
8. Under a seheme of nationalisation when the share of company air taken by the government 

 

Method of valuation of share

1 net asssts method 

2 yield method

3 fair value method

1. Net assets method :

This method is also called asset banking of increase value of a break of value method this method maybe you said for valuation of 1)equity share . 2)non participating preference share.3) participating preference share

Under this method and attached is made to determined as to how much amount per share a shareholder wheel receive on the date of determination of the value of shirt for this purpose it is necessary to calculate net asset and follow the following step.

 

                   Step in net assets method 

Step          particular.                                            Rs

1.        Tangible.real assets.                                  xxx

2.        Less: external liability.                              xxx          Net assets                                                     (xxx)

3.       Less: preference share capital

          (Premium on redemption of any).          xxx

4.      Less: share in surplus of 

         participating                                                (xxx)

5       net assets available for equity

         Share holders.    

                                        equity shareholders fund

  Value par share =                     ÷

                                         No of equity share

Notes:

• Net asset can be compounded on liabilities basis as (equity share capital +reserve surplus + profit or revaluation of assets - fictitious assets - accumulated losses - loss on revaluation of assets)
• Depreciation fund -if there is depreciation fund in respect of any fixed asset and on change in the value of asset given the dead fund to bay detected from the assets
• Proposet dividend - if the examination problem is siren student should made suitable assumption normally it is treated liability 
• If the preference share have a priority of repayment specification then the net asset apportioned between preference and equity share in the ratio of capital

 

2. Yield method:

This method is also called market value method investor and interested in income they have to price a share upoa the size of X parade dividends under these method prospective earning of the company air consider

Values of share is calculated by company of expanded red the dividend of a company with normal rate of dividend as prevailing in the industry

There are different way of calculating market value as-

A) on the basis of rate of dividend

                         Expected tare of dividend

No of share  =                     ÷                       ×paid cap

                          Normal rate of dividend

    

When the rate of dividend is not given it may be ascertained as

                                    Profit available for 

equity                                       shareholder

 Rate of dividend=              ÷                             ×100

                                   Equity share capital

                                    (paid up)

The dividend on equity share is calculated by during taxation transfer to reserve transport to debenture redemption fund preference dividend

If average profit is available instead of taking current year profit average profit is to be taken

This matter is it suitable for valuing small block of share

Capitalisation method:

According to this method the profits available to equity shareholder air convert into capital on the basis of normal expectations as under

100

  ÷                  ×  profit available for equity share    Expected%

Capital this private at a dividend by the number of share for. example suppose the capital is 10000 share of 100and the profit rs 150000 the normal rate is 10% the market value of share

100

  ÷.    × 1,50,000= Rs 15,000,00

 10

Rs 15,00,000

           ÷          =Rs.150 market value 

10,000share

3.Fair value method:

This is not a method but a compromise formula which fix the value of share as the average of the value obtained by increase volume method and the yield method

                       Net assets method+ yield method 

Fair value=                           ÷

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