Methods Of Valuation Of Shares

The methods of valuation depends on the purpose for which valuation is required. Generally, there are three
methods

1.

of

Net

valuation

Assets

Method

of

Of

shares:

Valuation

Of

Shares

Under this method, the net value of assets of the company are divided by the number of shares to arrive at the
value of each share. For the determination of net value of assets, it is necessary to estimate the worth of the
assets and liabilities. The goodwill as well as non-trading assets should also be included in total assets. The
following

points

should

be

considered

Goodwill

while

valuing

must

of

shares

according

be

to

this

properly

method:
valued

* The fictitious assets such as preliminary expenses, discount on issue of shares and debentures, accumulated
losses

etc.

The fixed

*
*

assets should

Provision
All

for

bad

unrecorded

should

Floating

assets
assets

be

taken

debts,
and

be
at

depreciation
liabilities

should

be

eliminated.

their
etc.

if

must

any)

taken

realizable
be

should
at

value.
considered.

be

considered.

market

value.

* The external liabilities such as sundry creditors, bills payable, loan, debentures etc. should be deducted from
the

value

of

assets

for

the determination

of net

value.

The net value of assets, determined so has to be divided by number of equity shares for finding out the value of
share.

Thus

Value

Per

2.

Yield

the

value

per

Share=(Net

Or

share

can

be

Assets-Preference

Market

Value

determined

Share

Method

by

using

the

Capital)/Number Of

Of

Valuation

following

formula:

Equity

Shares

Of

Shares

The expected rate of return in investment is denoted by yield. The term "rate of return" refers to the return
which a shareholder earns on his investment. Further it can be classified as (a) Rate of earning and (b) Rate of
dividend.

a.

In

other

words,

yield

may

be

Earning

earning

yield

and

dividend

yield.

Yield

Under this method, shares are valued on the basis of expected earning and normal rate of return. The value
per share

is calculated

by applying following

formula:

Value Per Share = (Expected rate of earning/Normal rate of return) X Paid up value of equity share

Expected

rate

of

earning

(Profit

after

b.

tax/paid

up

value

of

equity

share)

Dividend

100

Yield

Under this method, shares are valued on the basis of expected dividend and normal rate of return. The value
per share

is calculated

by applying following

formula:

Expected rate of dividend = (profit available for dividend/paid up equity share capital) X 100

Value

3.

per

share

Earning

(Expected

rate

Capacity

of

dividend/normal rate

Method

Of

of

return)

Valuation

Of

100

Shares

Under this method, the value per share is calculated on the basis of disposable profit of the company. The
disposable profit is found out by deducting reserves and taxes from net profit. The following steps are applied
for

the determination

Step
Step
Capitalized
Step

1:

of value

To
2:
Value
3:

find
To

=(

Profit
To

per

out

share

the

find
available

profit

out
for

equity

find

Value per share = Capitalized Value/Number of Shares

under

out

earning

capacity:

for

dividend

capitalized

value

available
the

dividend/Normal rate
value

of

return)
per

100
share