Methods for Valuation Of Shares

 VALUATION OF SHARES

INTRINSIC VALUE METHOD
THIS  METHOD ASSUMES HYPOTHETCAL  LIQUIDATION & CALCULATES REFUND PER EQUITY  SHARES.
FORMULAE:-
SUNDRY ASSETS:-                               XXXXX
LESS:-SUNDRY LIABILITIES            XXXXX
BALANCE                                               XXXXXX
LESS:
PREFRENCE EQUITY SHARE CAPITAL             XXXXXXX
PROPOSED DIVIDEND                                            XXXXXXX
 NET ASSETS AVAILABLE FOR EQUITY SHAREHOLDERS    XXXXXX                                                                                    
+ NOTIONAL CALLS                                                                            XXXXXX
TOTAL  ASSETS  AVAILABLE  FOR  EQUITYSHAREHOLDERS  XXXXXX
INTRINSIC VALUE PER SHARE:-       TOTAL ASSETS AVAAILABLE TO EQUITYSHAREHOLDERS
                                                                        EQUITY   SHARE CAPITAL (AFTER CALLS).
INTRINSIC VALUE IS VALUE FOR EQUITY SHAREHOLDERS THAT IS WHY WE HAVE DEDUCTED THE CAPITAL & DIVIDEND OF OTHER MEMNERS VIZ…………..PREFERENCE SHAREHOLDERS.
 OTHER NAMES OF INTRINSIC VALUE
NET ASSETS BREAKUP VALUE PER SHARE
NET  WORTH PER SHARE
BOOK  VALUE PER SHARE
WE ALWAYS CALCULATE I.VALUE EX-DIVIVIDEND AND THEN ADD DIVIDEND PER SHARE TO ARRIVE AT CUM-DIVIDEND I.VALUE.EA
2). CAPITALISATION METHOD               
EARNING CAPITALISATION METHOD( USED FOR LARGE LOT OF SHARES, PREFFERED METHOD IN COMPARISON TO DIVIDEND CAPITALISATION METHOD.)
FORMULAE:
VALUE OF SHARE:- EARNING RATE* PAID UP CAPITAL
                                       NRR (NORMAL RATE OF RETURN
   *EARNING RATE:- EARNING ATTRIBUTABLE TO EQUITY SHAREHOLDERS* 100
                                                              EQUITY SHARE CAPITAL.
** EARNING ATTRIBUTABLE TO EQUITY SHAREHOLDERS :-
                               FMP                                                                                      XXXXXX
LESS: – PREFERENCE DIVIDEND                                                              XXXXXX
EARNING ATTRIBUTABLE TO EQUITY SAHREHOLDER                  XXXXXX 
3.)  DIVIDEND CAPITALISATION MODEL: – USED FOR SMALL LOT OF SHARES (NON PREFERRED   METHOD.) 
VALUE OF SHARES:-                     DIVIDEND RATE* PAID UP CAPITAL
                                                              NRR
THIS METHOD IS APPLIED FOR VALUATION OF BOTH EQUITY & PREFERENCE SHARES,
WHERE DIVIDEND RATE WOULD BE GIVEN IN QUESTION OR CALCULATED BY USING AVERAGE OF PAST-DIVIDENDS.
4).FAIR VALUE METHOD
(USED WHENEVER CONTROLLING INTEREST(MORE THAN 50% IS BEING TRANSFERRED)
FORMULAE:-
VALUE OF SHARES:-  INTRINSIC VALUE+ EARNING CAPITALISATION VALUE*1/2  
IMPORTANT THING TO BE UNDERSTOOD IS HOW TO COMPUTE NRR?( FOR SHARES……………….PREVIOUS ONE WAS FOR GOODWILL VALUATION SO PLEASE NOTE THAT DO NOT CREATE CONFUSION MY FRIENDS.)
1). BEST METHOD IS CAPM (CAPITAL ASSET PRICING MODEL.)
2).ALTERNATE METHOD FOR ESTIMATE NRR
               NRR FOR INDUSTRY                                        XXXXX
+ – RISK FACTORS/NON RISK FACTORS                  XXXXX
           NRR OF THE COMPANY                                      XXXXX
RISK FACTORS  GENERALLY CONSIDERED BY SHAREHOLDERS            
RISK FACTOR 1 :- DIVIDEND TRACK RECORD OF THE COMPANY  VS  TRACK  RECORD  OF  INDUSTRY.
RISK FACTOR 2:- DEBT-EQUITY RATIO OR CAPITAL GEARING RATIO.
DEBT-EQUITY RATIO: – LONG TERM DEBT
                               EQUITY SHAREHOLDER FUNDS+                                                              PREFERENCE SHAREHOLDERS
CAPITAL GEARING RATIO: –    LONG TERM DEBT+ PREF SHARE CAPITAL
                                                          EQUITY SHAREHOLDER FUNDS
DECESSION :- LOW RATIOS LOW RISK.
RISK FACTOR 3:- ASSET PRICING RATIO
FORMULAE: –     INTRINSIC VALUE PER SHARE
                                 PAID UP VALUE PER SHARE
DECESSION:- HIGH RATIO HIGH RISK            
RISK FACTOR 4:-
COVERAGE RATIO
A). PREFERENCE DIVIDEND COVERAGE RATIO:-              PAT
                                                                                    PREFERENCE-DIVIDEND

DECESSION: HIGH RATIO LOW RISK.
B). EQUITY DIVIDEND COVERAGE RATIO:- PAT-PREF DIVIDEND
                                                                                   EQUITY DIVIDEND
DECESSION:- HIGH RATIO  LOW RISK. 
****NON RISK FACTORS CAN BE IGNORED FOR ADJUSTMENTS IN NRR.
****RISK PREMIUM SHALL BE ASSUMED AS ½%
***PROFIT= NET PROFIT= PROFIT BEFORE AFTER TAX.

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