VALUATION OF SHARES

Valuation Of Shares
Table No.1
Statement Showing Average Maintainable Profit
Particulars
Rs.
Rs.
Average Profit before tax*
Add- Abnormal Loss
          Capital Expenditure wrongly charged
Less- ExceptionalCasual Income
                                                Maintainable profit before tax
Less- Provision for tax         
                                                Maintainable profit after tax
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*If profits are fluctuating, simple average profit is considered.
   If profit is constantly decreasing, lowest of the profit is considered.
   If profit shows an increasing trend, weighted profit is considered.
Important Points:
1.       If there is any increase or decrease in value of assets, that does not affect annual trading profit.
But adjustment for undercharged or overcharged depreciation may be considered.

2.       Any decrease in value of current assets like bad debt should be considered.
Valuation of Shares
Table No.2
Statement Showing Capital Employed (From assets side)
Particulars
Rs.
Rs.
Fixed Assets*
Current Assets
Less- Current Liabilities
Capital Employed
Less- 12 of the current year’s trdaing profit**
Average Capital Employed
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*Self generated goodwill is not added but if there is purchased goodwill (goodwill at cost), it is added.
**Trading profit= Average profit after tax minusNon -trading profit ( Interest on investment etc.)
Table No.3
Statement Showing Capital Employed ( From liabilities side)
Particulars
Rs.
Rs.
Equity Share Capital
Preference Share Capital
Reserve & Surplus
Less- Fictitious Assets*
Capital Employed
Less- 12 of the current year’s trdaing profit
Average Capital Employed**
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* Fictitious Assets: Fictitious asset is nothing but an expense which is not yet written off.
   Examples-Miscllenous Expenditure, Discount on shares and debentures, Prelimanry Expenses, Profit &
                       Loss AC (Dr.), Commission on sale of shares and debentures etc.
** Calculation of average capital employed is possible, only if current year’s profit is given.
Important Point-
For calculating capital employed, proposed dividend on equity shares need not be deducted. But if shares are to be valued ex-dividend, dividend should be deducted.
Table No.4
Statement Showing Super Profit
Particulars
Rs.
Rs.
Average Profit before tax
Add- Interest on debenture and loan
Less- Interest on Investment
Average Trading Profit Before Tax
Less- Tax
Average Trading Profit After Tax
Less- Normal Profit (to be calculated on Capital or average capital employed)
Super Profit
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Value of Goodwill
1.       Average profit method:
Value of Goodwill= Average Maiantable Profit (As table No.1) X No. of years purchase
2.       Super Profit Method:
Value of Goodwill = Super Profit X No. of years purchase
3.       Capitalisation of average profit method:
Steps- i. Calculate normal capital employed as below:
Normal capital employed= Maintanable Profit Normal Rate of Return X 100
           ii. Calculate actual capital employed
          iii. Value of Goodwill= Normal Capital Employed Minus Actual Capital Employed
4.       Capitalisation of average profit method:
Value of Goodwill = Super Profit Normal Rate of Return X 100
Table No.5
Statement Showing Net Assets Available to Equity Share Holders
Particulars
Rs.
Rs.
         Capital Employed ( As table no. 1)
Add-Investments
         Goodwill ( As calculated as above)
         Notional Calls (Call not yet made)
Less-Debentures
           Long-term Loan
Net Assets Available to Equity Share Holders
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****
                       
Intrinsic value of shares Value per share under assets backing method:
          Fully paid shares = Net assets available to equity share holders No. of equity shares
          Partly paid shares = Value per fully paid share-Uncalled amount
Important Points-
If equity share capital consists of different denominations-
i.                     Calculate intrinsic value per Re.1 by applying the following formula=
Net Assets Available to Equity Share HoldersPaid up equity share capital
ii.                   Intrinsic value per equity share=Value per Re.1 X Paid up value of each equity share

Yield Method
Table No.6
Statement Showing Profit  Available to Equity Share Holders
Particulars
Rs.
Rs.
          Net profit before tax
Less-Tax
Net profit after tax
Less- Transfer to Reserves
           Preference Dividend
 
Profit  Available to Equity Share Holders
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Yield Value Per Equity Share:
1.       On the basis of rate of return
              Step 1- Expected rate of return = Profit  Available to Equity Share Holders X 100
                                      Paid Up Share Capital
              Step 2- Yield Value Per Equity Share = Expected Rate of Return X Paid up Value Per Equity Share
                                                                                                     Normal Rate of Return
2.       On the basis of capitalisation of profit
i.                    Value per fully paid share
Capital value of  Profit  Available to Equity Share Holders X 100
No. of shares
ii.                  Value per partly paid share
Step 1.
Market value per Re. 1 = Capital value of  Profit  Available to Equity Share Holders X 100
                                                                       Paid up equity capital
                     Step 2.
Value per share= Value per Re. 1 X Paid up value per share

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