Valuation of Shares
CA. Mandar Joshi
Circumstances where Valuation of Shares is essential
for decision making
Sale of shares by one person to another
Mergers, acquisitions & capital restructuring
Purchase & sale of shares in private companies and other
unquoted shares
Valuation of shares for tax purpose e.g. gift tax, wealth tax
When shares are pledged as collateral for a loan
Determining the amount payable to the dissenting shareholders
under section 494 of the companies act, 1956
Compensating the shareholders when the undertaking is
nationalised
Valuation of shares by an investment company
Need for Valuation of Shares
For the shares not listed on stock exchange
That is, where ready made market value of shares is not available
For the listed shares where there is no transaction
No takers for the shares of the company
Market quotation of shares may not show true valuation
Artificially Inflated market value of share
Volatile capital market conditions showing inaccurate market price
Valuation Statutorily required
Valuation of Shares required in instance of liquidation of company
Methods of Valuation of Shares
Asset Based
Valuation
Net Asset Method/ Intrinsic Value method/
Balance Sheet Method
Profit Based
Method
Yield Method
Asset & Profit
Based Method
Market Price
Approach Method
Other Method
Fair Value Method
Price Earning Multiple
Book Value Multiple
Discounted Cash Flow Method
Net Assets Method - Suitability
SUITABILITY OF NET ASSETS
METHOD
Amalgamation
Sick
Companies
(Revivals or
liquidation)
Unquoted
Equity Shares Lenders (when
forming part of
shares are
wealth (Where
pledged as
market value
security
is not readily
against loan)
available)
Net Assets Method Steps to solve the
question
Step 1
Net Assets for Equity Share Holders (Total Assets
Outside Liabilities)
Step 2
Calculate total number of shares outstanding in the
market
Step 3
Calculate value per share: Step 1/ Step 2
Net Assets Method
Step 1 Calculation of Net Assets for Equity Share Holders (NA
for ESH)
Closing Capital Employed (Assets excluding Goodwill
Outside Liabilities excluding Preference Capital)
XXX
(Based on revised value of assets and liabilities)
Less: Proposed Dividend
(XXX)
Add: Goodwill as per valuation
XXX
Total (A)
XXX
Less: Amount due to Preference Share Holders
Preference Share Capital
XXX
Step 2 Value Per Share (VPS)
Premium
on redemption of Pref Capital
NA for ESH / Total no. of Equity Share
Unpaid Preference
Dividend
Add: Notional Calls for Partly Paid up Capital
XXX
XXX
Total (B)
XXX
(A - B)
XXX
XXX
Net Assets Method
Valuation of Goodwill
Valuation of goodwill is an essential and integrated part of the
valuation of shares
Goodwill valuation implies that how much potential value
company is holding at the time of valuation of shares
(Always start the solution with calculation of goodwill)
Steps to calculate goodwill
Step 1
Adusted Profits for the past years (Future
Maintainable Profit)
Step 2
Average Adjusted Future Maintainable Profits
Step 3
Calculation of normal profits
Normal Profits = Capital Employed X Normal Rate of Return
Step 4
Super Profits = Adjusted Average Profits - Normal Profits
Step 5
(Step 2 - Step 3)
Goodwill = Super Profits X No. of years considered for goodwill
Solution:
Step 1: Calculation of Net Assets for Equity Shareholders
a) Calculation fo Goodwill
i) Future Maintainable Profits
Particulars
Profit as per books
2010-11
2011-12
2012-13
2013-14
Rs.
Rs.
Rs.
Rs.
18,00,000
Add: Capital Expenditure of machinery charged to
revenue
20,50,000
23,00,000
24,50,000
2,00,000
Less:
Depreciation on Machinery for 3 years on reducing
balance method
20,000
18,000
Adjusted for overvaluation of stock
16,200
1,00,000
Adjusted for Bad Debts
20,000
Adjusted Future Maintainable Profits
18,00,000
ii) Average Adjusted Future Maintainable Profits =
22,30,000
22,82,000
23,13,800
18,00,000 + 22,30,000 + 22,82,000 + 23,13,800
4
=
21,56,450
iii) Calculation of Normal Profit
Normal Profit = Capital Employed X Return on capital
iv) Calculation of Capital Employed
Particulars
Rs
Rs
Assets
Fixed Assets
Building
Machinery
24,00,000
22,00,000
(Consider machinery newly included)
WDV of Machinery newly included
Gross Value
Less: Accumulated Depreciation for 3 years
2,00,000
54,200
1,45,800
23,45,800
Furniture
10,00,000
Vehicle
18,00,000
Total Fixed Assets
75,45,800
Add: 30% Increase in the value of FA
22,63,740
Total Revalued FA
98,09,540
v) Calculation of Normal Profit
Capital Employed/ Net Worth
96,09,540
Rate of return on capital
20%
Normal Profit
vi) Calculation of Super Profit
19,21,908
=Average Adjusted Future Maintainable Profit - Normal Profit
=2156450 - 1921908
Super Profit =
vii) Goodwill (Two years purchase of Super Profit)
2,34,542
=2,34,542 X 2
Goodwill =
4,69,084
Step 2: Net Assets for Equity Share Holders
Particulars
Closing Capital Employed
Goodwill (As revalued)
Rs
Rs
96,09,540
4,69,084
1,00,78,624
Less:
Preference Share Capital
20,00,000
Yield Method
SUITABILITY OF YIELD
METHOD
Use for
valuation of
small
companies
Investors
More interested
in Yield, i.e.,
Dividend or
Earnings
Yield Method Steps to Solve the
Question
Future Maintainable Profits for Equity Shareholders
Expected Yield (Percentage given in the question)
Capitalised Value of FMP
=FMP for ESH X 100/ Expected Yield
Value Per Share
= Capitalised Value of FMP / No. of equity shares
Fair Value Method
Purely theoretical method of valuation
Compromised formula fixing the value of the
shares as average of Net Assets Method and
Yield Method
Fair Value = NA Method Value + Yield Method
Value
2
