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Determining a method for valuation of shares in a company can be done by investors in a variety of ways. This process can be necessary for those investors who have shares in a privately owned company and cannot immediately point to a stock market price as a determination of value. Those traders who have publicly owned stock may also want to delve deeper than market prices to figure out the valuation of shares. Some valuation methods include earnings ratios, dividend expectations, and more subjective methods focused on a company's leadership and strategies.
VALUATION METHODOLOGIES
There are many methodologies that a valuer may use/ consider to value the Shares of a Company/Business. Though different values are arrived under various methods, it is necessary for a valuer to arrive at a fair value for the company. In practice, the valuer normally, uses several methodologies of valuation, and arrives at a fair price for the entire business.
The Methodologies of Valuation also depend on the purpose of the valuation. If the Valuation is for the purpose of liquidation, the valuer would want to use the Realisable Value of the Net Assets of the Company and not the Earnings Capacity since; in this case the Company will not exist and the shareholders will be left with the Net Assets. Similarly, during a Merger, the valuer would want to value the companies involved in a similar manner to arrive at a relative value. Generally accepted valuation methods are as follows:
1. Net Asset Method
2. Earnings Capitalisation Method
3. Yield Method
4. Market Price Method
5. Discounted Cash Flow Method
Each method proceeds on different fundamental assumptions, which have greater or lesser relevance, and at times even no relevance to a given situation. Thus, the methods to be adopted for a particular valuation must be judiciously chosen.
1. Net asset method
2.Yield method
3. Fair value method
4.Market price approach
5. Discounted cash flow approch
Estimate the share of in-kind exaggerated time without evaluating the impact of what undergone from the rise or decline
The methods of valuation depends on the purpose for which valuation is required. Generally, there are three methods of valuation of shares:
1. Net Assets Method Of 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 while valuing of shares according to this method: * Goodwill must be properly valued
* The fictitious assets such as preliminary expenses, discount on issue of shares and debentures, accumulated losses etc. should be eliminated.
* The fixed assets should be taken at their realizable value.
* Provision for bad debts, depreciation etc. must be considered.
* All unrecorded assets and liabilities ( if any) should be considered.
* Floating assets should be taken at 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 the value per share can be determined by using the following formula:
Value Per Share=(Net Assets-Preference Share Capital)/Number Of Equity Shares
2. Yield Or Market Value Method Of Valuation 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. In other words, yield may be earning yield and dividend yield
.a. Earning 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 shareExpected rate of earning = (Profit after tax/paid up value of equity share) X100
b. Dividend 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) X100Value per share = (Expected rate of dividend/normal rate of return) X100
3. Earning Capacity Method Of Valuation Of 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 of value per share under earning capacity:
Step1: To find out the profit available for dividend
Step2: To find out the capitalized value
Capitalized Value =( Profit available for equity dividend/Normal rate of return) X100
Step3: To find out value per share
Value per share = Capitalized Value/Number of Shares
