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.