Valuation of Shares presentaion

1. CA. Mandar Joshi
Valuation of Shares

2. 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

3. 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

4. Methods of Valuation of Shares
• Net Asset Method/ Intrinsic Value method/
Balance Sheet Method
Asset Based
Valuation
• Yield Method
Profit Based
Method
• Fair Value Method
Asset & Profit
Based Method
• Price Earning Multiple
• Book Value Multiple
Market Price
Approach Method
• Discounted Cash Flow MethodOther Method

5. Net Assets Method - Suitability
SUITABILITY OF NET ASSETS
METHOD
Amalgamation
Sick
Companies
(Revivals or
liquidation)
Unquoted
Equity Shares
forming part of
wealth (Where
market value
is not readily
available)
Lenders (when
shares are
pledged as
security
against loan)

6. Net Assets Method – Steps to solve
the question
• Net Assets for Equity Share Holders (Total Assets –
Outside Liabilities)
Step 1
• Calculate total number of shares outstanding in the
market
Step 2
• Calculate value per share: Step 1/ Step 2
Step 3

7. Net Assets Method
 Step 1 – Calculation of Net Assets for Equity Share Holders (NA
for ESH)
 Step 2 – Value Per Share (VPS)
 NA for ESH / Total no. of Equity Share
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
Premium on redemption of Pref Capital XXX
Unpaid Preference Dividend XXX
Total (B) XXX
(A - B) XXX
Add: Notional Calls for Partly Paid up Capital XXX
NA for ESH XXX

8. 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 2 - Step 3)
Step 5 Goodwill = Super Profits X No. of years considered for goodwill

9. Solution:
Step 1: Calculation of Net Assets for Equity Shareholders
a) Calculation fo Goodwill
i) Future Maintainable Profits
Particulars 2010-11 2011-12 2012-13 2013-14
Rs. Rs. Rs. Rs.
Profit as per books 18,00,000 20,50,000 23,00,000 24,50,000
Add: Capital Expenditure of machinery charged to revenue 2,00,000
Less:
Depreciation on Machinery for 3 years on reducing
balance method 20,000 18,000 16,200
Adjusted for overvaluation of stock 1,00,000
Adjusted for Bad Debts 20,000
Adjusted Future Maintainable Profits 18,00,000 22,30,000 22,82,000 23,13,800
ii) Average Adjusted Future Maintainable Profits = 18,00,000 + 22,30,000 + 22,82,000 + 23,13,800
4
= 21,56,450

10. 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 24,00,000
Machinery 22,00,000
(Consider machinery newly included)
WDV of Machinery newly included
Gross Value 2,00,000
Less: Accumulated Depreciation for 3 years 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
Current Assets
Investment 16,00,000
Stock 11,00,000
Less: Overvauation 1,00,000 10,00,000
Debtors 18,00,000
Less: Bad Debts 20,000 17,80,000
Bank Balance 3,20,000
Total Revalued Current Assets 47,00,000
Total Assets (A) 1,45,09,540
Less: Outside Liabilities
Bank Loan - Secured Against Fixed Assets 12,00,000
Bills Payable 6,00,000
Creditors 31,00,000
Total Liabilities (B) 49,00,000
Capital Employed/ Net Worth 96,09,540

11. v) Calculation of Normal Profit
Capital Employed/ Net Worth 96,09,540
Rate of return on capital 20%
Normal Profit 19,21,908
vi) Calculation of Super Profit =Average Adjusted Future Maintainable Profit - Normal Profit
=2156450 - 1921908
Super Profit = 2,34,542
vii) Goodwill (Two years purchase of Super Profit) =2,34,542 X 2
Goodwill = 4,69,084
Step 2: Net Assets for Equity Share Holders
Particulars Rs Rs
Closing Capital Employed 96,09,540
Goodwill (As revalued) 4,69,084
1,00,78,624
Less:
Preference Share Capital 20,00,000
Net Assets for Equity Share Holders 80,78,624
Step 3: Value per share
Value per share = NA for ESH / No. of equity shares = 80,78,624 / 4,00,000
Value per Share Rs. 20.20

12. Yield Method
SUITABILITY OF YIELD
METHOD
Use for
valuation of
small
companies
Investors –
More interested
in Yield, i.e.,
Dividend or
Earnings

13. 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

14. 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
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