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623 views24 pagesValuation of Shares
Valuation of share yrbjtc hfhkfevjigrcb jfrgjfdvh btdhhffb hedgngf ktdvnjfgjvhkfivbjhgtcvub kgfbjhcfv bregnkhgfghkhcj jvjfrbiitbjtdqfnjuf hregifdvjig gfudtdvyfygivjvuv jgkfjdhcyjgvhcyhfgl
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16
VALUATION OF SHARES
According to the Companies Act, 1956 share means Share in the Share Capital ofa
company, and includes stock except where a distinction between stock and share is expressed
or implied. :
"An amount is noted on each share of a company, this is known as face value of the shares,
‘A-company has issued 10,000 shares of € 10 each, in this case the amount of ® 10 is the face
value of the share and it is also called par value. Market price of the share may be less or more
than the face value of the share.
‘According to Meigs W.B., the unit of corporate ownership is a share or stock.
‘According to Pickles, from accounting point of view valuation of shares is a difficult
problem. Though the underlying principles are by no means difficult but their application calls
for a considerable knowledge of technical points.
Finding out Value of Shares
‘The shares which are included in the list of stock exchange are quoted in the newspapers
but the shares which are not quoted, are valued and their value is found out by various
methods. On many occasions even the value of quoted shares is also found out.
Necessity of valuation of shares : In the following cases valuation of shares is necessary:
(1) When two or more than two companies amalgamate, valuation of shares is made.
@) Valuation of shares is made when shares of one type are converted into shares of
another type.
(3) When absorption of a company takes place, valuation of shares is made.
(4) When one company wants to become holding company of another company, it acquires
more than 50 per cent shares of that company and on this occasion valuation of shares is made.
(5) When some companies are taken over by the Government, compensation is paid by
the Govt. to the shareholders of such companies and on this occasion valuation of shares 8
made.
(6) When some shareholders do not give their consent for reconstructi ,
their shares are valued for the purpose of acquisition, etian of a comp
(7) Valuation of such shares is made which are not quoted in stock
: i exchange.
(8) On the sale of business of a private company in order to find ont a
position its shares are valued. find, aut its correct finan
(9) Ifthe property consists of shares, these shares are valued for t tax.
(10) On many gecasions sharon of trust companies an finance Spee ates
(11) When bank gives loans on the security of the shares of
company are valued, of a company the shares of such
(12) In any other cases where valuation of shares is requi i °
particular ease, valuation of shares is made, Tequired as por requirements of v 551
ON OF Bs
‘TYPES:
atv of shares may be of the fallowing tae OF sHAREs
8:
par valve, 2 Book value, 3, Market
7. Fair value.
al Far Value : The amount
samen, this amount is, cle ot re nas company is mentioned in the Memorandum
oi and es eed face value is discount, lue of the share, More than par or face value is
Value : When capital 7
2 Bet evalt so arrived at na company shown by its books is divided by its number of
Oe a ore dace ale book value ofthe share, Share capital and reserves
sired inthe share mer, of a share means that value at which this share is sold
oa ale. I iclodes ne a sharcholder has to pay in order to acquire a share is
ll 8 market price and brokerage ete. paid for the purchase of the
value, 4, Cost value, 5. Capitalised value, 6. intrinsic
sae
5, Capitalized Value : Average of profits of the company is capitalised at normal rate of
furt, this is called capitalised value of the shares. This amount is divided by a number of
‘hares of the company in order to find out the Capitalised value of each share of a company:
6, Intrinsic Value : Realisable amount of real assets of company on a particular date is
fund out. Amount of external liabilities is deducted from realisable amount of real assets, the
palance is known as intrinsic value of shares. This intrinsic value is divided by number of
shares and the result is intrinsic. value of one share.
7 Fair Value : Total of intrinsic value and yield or market value of a share is divided by
two in order to find out fair value.
FACTORS AFFECTING VALUE OF SHARES
Following factors affect value of shares :
1. Nature of business.
2, Earning capacity of the company.
3, Dividends declared by the Company in previous years.
4, Net tangible assets of the Company.
5. Capital structure of the Company.
6. Goodwill of the Company.
7. Investment of other parties in this Company.
8. Nature and extent of competition.
9, Number of shareholders.
10. Qualifications, capacity and experience of
11. Demand and supply of shares.
12. Possibility of progress of the company in future.
13. Scope of Government control over the company.
14. Position of peace and security in the country.
15, Political conditions.
16. Restrictions of investments in the Company.
11. type of management of the company and possibility ofits continuance,
METH
the directors.
(ODS OF VALUATION OF SHARES ‘
the Companies Act, though provision may
ty, method of valuation of shares is given in
toad in the Articles of Association of the company for it 552 SAHITYA BHAWAN PUBLICATIONS __ a
Ordinarily following methods o ion of shares are adopted :
1. Asset valuation oothodn ‘Yield valuation method, 3. Fair value method 4. Eaming
per Share Method.
1) ASSET VALUATION METHOD . A
Following procedure is adopted for finding out value of shares according eee pate :
(1) To find out realisable value of real assets of the company See a lue of all the
assets of the company are totalled up. Of course fictitious assets like. Prelim mary expense,
discount on shares and debentures and debit balance of profit and loss account should not be
added for this purpose, ae ane
(2) To find on? total of external liabilities : External liabilities are ee liabilities which
the company has to pay to outsiders, like—creditors, debentures, isibortred oan, employees
saving fund etc. The amount of sharcholder’s money is not to be included such as—share
capital, reserve and funds, credit balance of profit and loss account. aoa
(8) To find out the value of net assets : After calculating realisable value of assets ang
liabilities the value of net assets may be found out by deducting the value of external liabilities
from the value of real assets. The amount of net assets should be divided by number of shares
which will give the value of one share.
In the form of formula, it may be as follows : estan
(i) Value of net assets = Total of realisable assets - Total of external liabilities
Value of net assets
Number of shares
Alternative method : For calculating the value of share there is another method according
to which reserves and funds, profit of the company, profit on revaluation of assets are added
to share capital of the company. Out of this total loss on revaluation, business loss, and deferred
revenue expenditure are to be deducted and this is divided by number of shares that will give
the value of one share. In the form of formula :
G) Value of net assets = (Share capital of the company + Undistributed reserves
and funds + Profit of the company + profit on revaluation
of assets) — (Loss on revaluation + Business loss + Deferred
revenue expenditure)
Value of Net assets
Number of shares .
The following considerations are required for calculating name of one share under assets
valuation method :
“According to section 85 of Indian Companies Act, 1956 preference share is that share on
which a fixed rate of dividend is to be paid and at the time of liquidation such shares have
priority for payment. Therefore, if in the balance sheet preference shares are given, then the
value of share shall be calculated as follows :
(2) If according to Articles of Association preference shares have priority only for capital,
then the amount of preference capital is deducted from net assets and the balance is divided
by number of equity shares to find out the value of one equity share. In form of formula :
Value of one equity share = Value of net assets ~ Pref. share capi
; ‘ Total number of equ
(2) On the above basis value of preference share can be ealevlat
(ii) Value of one share =
i) Value of one share =
ted by the following formula :
Value of one pref, share = qPtoforonce share capital :
: Total number of pref, shares
(3) Ifaccording to Articles of Association of tho company, preference shares have priority
only for dividend, then dividend on preference shares is deducted from net assets and balane? VALUATION 553
OF SHARES
idea by the total number of preference aa
is
qa de
at ae and equity shares for calculating the value of one
a formula is as follows ;
phe 3
ne ~ Dividend on pref. shares
(gyonthe above condition ifthe value 2 BUMPer of pref. and equity shares
pain cn e applied : preference share is to be found, then the following
Prof. st
| Value of one share = Value of not assets
value of one pref. share =
ea
aro en pital + Dividend on pref, shares
(@) If preference shares have priority of menor of Pret. shares
hare ean be caleulated go reife jo Payment of eapital and dividend, then the value
ofequit ei lows :
Yalue of one equity share = Value of not assets ~ (Pref. share capital + Divi. on pref. shares)
. . Total
(6) according to Articles of Association and Memes
reference Ered have i Priority of payment of capital and dividend, which means both have
equal rights then the value of one share can be calculated dividing the value of net assets by
total number of equity and preference shares, In the f
form of formula :
Value of one share = Value of net assets
Total number of equity and pref. sh:
i al pref. shares
(@ In addition to the above rights as per section 85 of the Companies Act, many other
rights may be given on preference shares as per provisions of Memorandum and Articles of
sociation, namely.
r of equity shat
andum of Association of the eompany
1. Ifsome dividend could not‘be paid on cumulative preference shares during past years
ue to insufficiency of profits, it may be paid in future years.
2. equity shareholders are paid dividend at a certain fixed rate, then first of all dividend
is paid to preference shareholders out of profit and from the balance, dividend at fixed rate
may be given to equity shareholders and even then if profits remain, preference shareholders
nay be given a right to share dividend out of this remaining profit.
3. If an amount is left after payment of capital to equity shareholders, then preference
shareholders may be giyen a right to share this balance.
In addition to the above rights of preference shareholders as per Companies Act,
Memorandum and Articles of Association, if any additional right is mentioned in the question,
itshould be taken into consideration accordingly.
Various names : Assets valuation method is known by following names :
() Net asset valuation method.
(ii) Capital valuation method.
(ii) Valuation of equity basis method.
(iv) Intrinsic value method.
(v) Break-up value method.
Difficulties in Asset Valuation Method ' » ised of as aso RE pain
1. Selectic an asset : There are many types of values of et, 28. 8
“ncern vile, eo value, break-up value, and market value etc. The difficulty is as
which valu e values is to be taken up. | eee
2, Valuation of riablities : Valuation of liabilities is.a diff icult as pe oe aye even
lia ” question may not be real. If some contingent liabilities are likely come real
lite i in liabilities.
3, Fone ay ohare® + When some equity shares are filly paid and others
*° partly paid, it creates difficulty in allocation of the ‘amount of net assets amongst both 554 SAHITYA: BHAWAN PUBLICATIONS
secn alee
types of equity shares, Under these circumstances, amount of net assets be distributed in ty,
ratio of paid-up capital on equity shares, : i
4, Amount nd to Pivfetonee shares : Various rights of these shares are mentioned j
the Memorandum and Articles of Association, these rights sometimes create difficulties in
valuation, hence they must be applied very carefully. mt
Valuation of Shares after taking Valuation of Goodwill into Consideration 1
Illustration 1 .
From the following information, find out the value of each share:
Balance Sheet of X Company
z r
Share Capital : Fixed Assets:
20,000 Equity sharos of € 10 Goodwill 1,90,000
each 2,00,000 | Investments 3,00,009
Reserves and Surplus : Current Assets, Loans and
Reserves 2,50,000| Advances:
Profit and Loss A/e 30,000} (a) Current Assets 50,009
Unsecured Lo 80,000} _(b) Loans and Advances 30,000
Current Liabilities 20,000 | Misc. Expenditure |__ 10,000
= | 5,80,000 {520,000
For the purpose of valuation of shares goodwill shall be taken at two years’ purchase of the average profits ofthe
last five years. The profits for the last five years are: ¥ 60,000; % 70,000; % 40,000; % 50,000 and % 50,000.
( Solution 1 °
Total Profit = = 60,000 + % 70,000 + & 40,000 + & 50,000 + % 50,000 = & 2,70,000
Average Profits = ¢ 2:70,009 _ x 54,000
Goodwill = ¢ 54,000 x 2 = 1,08,000
a4
Goodwill 108,000
Investments 300,000
Current Assets» “750,000
Loans and Advances 30,000
— |
758,000 |
Less : Unsecured Loans 20,000
Current Liabilities and Provisions 20,000 —_1,00,000
3,88,000 ' jae
f = 3:88,000 _
Value of one equity share = 53000 « x 19.40
Alternative Method
Capital
Add : Reserves ‘
Add : Profit i
Less : Reduction in Value of Goodwill & Misu, Expenditure
8,88,000
Value of one equity share = “S540 = ¥ 19,40 — VALUATION OF SHARES 555
Dee
Goodwill as per Balance Sheet, .
Revalued amount Lone
1,08,000__
Mise. Expenditure Reduction 82,000
10,000
5 z = 92,000_
mlustrgtion 2 ; aaa
‘The Balan Se a imited company as on 31st December, 2008 is as undor
. 8 Amount Assets Amount
21000 Eauiy Shares of 1) ese asus aa
o 50,
oe 2,00,000 | Current Assets 1,00,000
Profit & Loss A/e ye Goodwill 20,000
5% Debentures _ 50,000
Current Liabilities 65,000
1 170,000
‘On Bist December, 2008 the fixed assets we il
value of the company’s shares by asset: faethe, vere valued at € 1,75,000 and the goodwill of & ee cain
Solution 2 Calculation of Assets i
Fixed Assets F % 1,75,000
Current Assets : : 1,00,000
Goodwill 25,000
. Total 3,00,000
Less : Liabilities
5% Debentures . 50,000
Current Liabilities 65,000
Net Assets
Value of per Equity Share = 450.000 - x 9.25
Illustration 3
The net profit of the company, whose B/S of 31st December, 2008 is given below, after deducting all working
‘expenses and provisions for depreciation and taxation are :
2004 & 70,000; 2005 % 75,000; 2006 % 80,000; 2007 & 90,000; 2008 % 85,000.
Balance Sheet (As at 3lst December, 2008)
z
Capital:
ital: 40,000 shares of Z 10 «ggano
Profit and Loss x
Creditors 80.909
rovision for Tax ;
Dividend 70,000
%
Buildings 300,000
'80,000
Debtors 2,00,000
Stock '50,000
Cash 20,000
= [_6,50,000_
iildin i tively valyed at and % 85,000 on 31st Dec., 2008. The fair return
in nai na Machines wore epee 72 oa pm. Bia out veo shine ser tag a
‘consideration the value of goodwill based on 3 years’ purchase of the annual super ‘profits.
a
Buildi ings 3,10,000
Machine’, '85,000
Debtors 2,00,900
000
Cask |_20:000_
Total of Real Assets 6,65,000.
| ePRE ERE RE] alt ie
i 4
a 556 SAHITYA BHAWAN PUBLICATIONS
Less: Creditors
Provision for tax
60,000
30,000
Capital Employed
—half of current year profit (85,000 x 4%)
‘Average Capital employed
Normal return = aT x8 . 42,600 Lesa
= 4,00,000
Total of profits = € 70,000 + 75,000 + 80,000 + 90,000 + 85,000 = 4,
Average Profit = 4,00,000 + 6 = ¢ 80,000
Super Profit = Average Profit - Normal Profit,
Super Profit = % 80,000 — 42,600 = % 37,400
Goodwill = 37,400 x 3 = % 1,12,200.
z
Goodwill (as Calculated above) pi2a0
uildings 10,009
Machinery 4 85,009
Debtors 00,009
Stock 50,009
Cash 120,009
Total of Real Assets 1,77,
Less : External Liabilities (60,000 + 30,000) : {_ 90,009,
a 687,
Net Assets or Intrinsic'value of shares | 8.87,200
— 6,87,200 _
Value of one share = 40,000 ~ z 17.18
Illustration 4
Following is the Balance Sheet of Imperial Manufacturing Company :
z t
Capital : 8,800 shares of 250 Land 2,26,000
each fully paid 22,00,000} Building 11,73,000
Reserve Fund ’ 8,24,000} Plant and Machinery (on cost) 20,58,00
Employees’ Savings A/c . 2,27,000] Stock (Market price) 26,00,000
Workmen's Security Deposit 54,000] Preliminary expenses 25,00
Depreciation Fund A/c 463,000) Book Debts 3,35,000
Creditors 38,86,000] Investment (Market Price) 17,00,00
Profit and Loss A/c 36,12,000| Cash & Bank Balances 31,4900
= [1,12,66,000] x [13.6600
Depreciation fund is more than reasonable depreciation by & 64,000. Find out Intrinsic value of the shar
Solution 4
t
Total Assets as per Balance Sheet
act ae Pe 1,12,66,000
Less : (i) Preliminary expenses ae sod ;
i) Depreciation fund (4,63,000 — 54,000) x saint
Real Assets _4,09,000_