VALUATION OF SHARES - Accounts Knowledge Hub

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	** **	** **

*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**	** **	** **

*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**	** **	** **

* 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	** **	** **

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	** **	** **

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	** **	** **

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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