VALUATION OF NAME – Anshuman pradhan
REG. NO. – 190415100033
SHARES SUBJECT – CORPORATE
ACCOUNTING
SHARES
A company’s capital is divided into small equal units of a finite number. Each unit is
known as a share. In simple terms, a share is a percentage of ownership in a
company or a financial asset. Investors who hold shares of any company are known
as shareholders.
For example ; if the market capitalization of a company is Rs. 20 lakh, and a single
share is priced at Rs. 20 then the number of shares to be issued will be 1 lakh.
NATURES OF SHARES
Shareholding is a complex system of joint ownership. The shareholders jointly own the
company. At the same time a share is itself an item of property which (subject to the
company's articles) can be transferred by sale or gift.
In return for investing in a company a shareholder gets a bundle of rights in the company
which may vary according to the type of shares acquired.
The main rights which usually attach to shares are –
To attend general meeting and vote.
To a share of the company profit.
To a final distribution and winding up.
That the company be run lawfully.
FACTORS AFFECTING
VALUATION OF SHARES
The factors affecting valuation of shares are –
The Nature of business.
The income yielding capacity of the company. An important factor is the financial
performance of the underlying company.
The demand and supply of shares, when demand for shares exceeds supply, which means
the buyers are more than sellers, the prices increase.
The percentage of dividend declared on shares. When companies make dividend
announcements, the share prices of such companies are likely to increase.
The availability of sufficient assets over liabilities. Fluctuations in the economy feature
what is commonly referred to as booms and depressions.
NEED OF VALUATION OF
SHARES
For estate duty and wealth tax purpose.
For amalgamation and absorption schemes.
Purchasing shares for control.
For selling shares of a shareholder to a purchaser.
For the conversion of one of class share to another class.
For the compensation made to a company when the said company is being
nationalized.
For granting loans on the basis of security of shares (i.e, when the shares are held as
security).
METHODS OF VALUE OF
SHARE
1.ASSET BACKING METHOD
2.YIELD BASIS METHOD
3.FAIR VALUE METHOD
4.RETURN ON CAPITAL EMPLOYED METHOD
5.PRICE EARNING RATION METHOD
ASSET-BACKING METHOD
Since the valuation is made on the basis of the assets of the company, it is known as Asset-
Basis or Asset- Backing Method. At the same time, the shares are valued on the basis of real
internal value of the assets of the company and that is why the method is also termed
Intrinsic Value Method or Real Value Basis Method.
This method may be made either:
1. On a going/continuing concern basis; and
2. Break-up value basis.
However, this following step should carefully be followed while calculating Net
Assets or the Funds Available for Equity Shareholders:
(a) Ascertain the total market value of fixed assets and current assets;
(b) Compute the value of goodwill (as per the required method);
(c) Ascertain the total market value of non-trading assets (like investment) which are to be
added;
(d) All fictitious assets (viz, Preliminary Expenses, Discount on issue of
Shares/Debentures, Debit-Balance of P&L A/c etc.) must be excluded;
(e) Deduct the total amount of Current Liabilities, Amount of Debentures with arrear
interest,” if any, Preference Share Capital with arrear dividend, if any.
(f) The balance left is called the Net Assets or Funds Available for Equity Shareholders.
YIELD-BASIS METHOD
This approach focuses on the expected benefits from the business investment, i.e.,
what the business generates in the future.
One of the popular methods under this approach is the Value per Share method.
Here, the value per share is calculated on the basis of the profit of the company
which is available for distribution to the shareholders. This profit can be determined
by deducting reserves and taxes from the net profit.
STEPS
1. Calculate the company’s profit , which is available for dividend distribution.
2. Obtain the normal rate of return for the relevant Industry.
3. Calculate the capitalized value as ( profit for distribution*100/Rate of return).
4. Divide the value by the number of shares.
CONCLUSION
Whether you are a trader or a long-term investor, the practice of share valuation is
vital to your knowledge and success.
Thus traders can use various methods of share valuation to compare stocks of
different companies. Long-term investors can evaluate their future prospects via
various methods and approach them.
Therefore, it is essential to update yourself with the best methods of share valuation
as per your requirements and goals.
