Corporale Accountin Valuation of Shares

Factors to be considered while valuing the Shares

The value of shares of Thie Intrinsic value of each Equity Share can be calculated as follows
a
company is influenced by many factors. The following are some of the
important factors that are to be taken into
consideration, while valuing the shares of a Calculation of Intrinsic value per Share
company:
1 The nature of business of the company. Particular
2 The stability of earnings of the company. Market value of Assets:
3. The earning capacity of the company. Gcodwill
4. The capacity of
rmanagement of the company. Land&Buildings
Plant & Machinery
The dernand for and the supply of shares of the company. Furnitures
6The economic and political conditions in the country. Patents & Trade Marks
Motor veficles
The value of goodwill of the company. InvestmentS
8. The the
progress ot company.
The nature of
competition.
Methods of
Valuation ot Shares Bills receivabje
The various methods of valuation of shares SfoCK 1n Trade
can be broadly classified into three types. They are:
Prepand Expenses etc.
Net Asset Method or
Intrinsic Valtuc Method. Less,aalhabilnier:
2, Yield Method
Debenturcs
Mortguge loans
3 Earning Capacity Melhod. Loans
1. Net Assets Method
Fixed deposits from pabic
Sundry Creditors
Under this method, the value of shares is determined by adding the market values of all asets Bills payable
Bank overdratt
including unrecorded assets, Goodwill, and Investments and deducting from that, the total liabilities
payable to outsiders i.e, Secured Loans, unsecured loans and current liabilities. The amount so Unclaimed dividend
Provision for taxatión
is called net value of assets available to shareholders. From the value of net assets
arrived
availabie to shareholders, the total paid up, Preference Share Capital and arrears of preference dividend, roposed av1dend
if any, must be deducted. The resulting balance is the net value of assets available for Equity Empioyces
Workmen's
Provident Fund wwe
Savings Bamk A/e
Shareholders. The intrinsic value of each Equity Share is calculated by dividing the net assets
available for Equity Sharcholders by number of Equity Shares
Depreciation Fund ete.
Nct value otAsets avalabie to sharcholders
ess: Amaunts payable to
Preference relh
Opctcrence dividend
(0 eterence.Share Capital,
Net Value olASsets availablo tor Equity Shareholders
treNet value ot assets uvatlabie for oguity sharebolders
Numtber ot oyuy Suts
Key Points
T h e aSsets must be considered at their MARKET VALUES at the time of valuation, but not at book
values.
2. When there are both fully paid and partly paid shares, the following procedure must be adopted in
calculating their market values.
 Valuarian e Share
al Calculate the total valuc of tet assets
using the tollowing tommu Solution:
Calculation of intrinsic value per share
aAE Naug of Ascts sTotal liabilies| + Notional calls on party paid Equiy Shares
Asse
Market walues f
Fixed As 4,00.000
() Dhtact from the above Total value of Net Axsets, the claims of preference shareholders
Current Aset (2.30.000 12000) 438,000 6,38,000
(e Divkle the balanee by the total number of Equity Shares i.e., fally paid shares and partiy pad snares.
Less: Toal tiabilities
Debentures 1.00,000
(40 From the value per share obtained, dedact the notional call per share in case of partly paid shares.
Depreciation und 1,00.000
(etoe vaue
tn (el represents tntnasic valoe of fully paid share and the value in (d) represents Vaiue Sundry Creditors 70,000
partiy paid share, micrest on decnturcs due 6,000 2,76.000
When preference shareholders does not have any preferential nght either on captal or on areas ot
Net Asets available for Shareholácrs
e t c r e n c e Sare Caputal
S.62,000
dividend, then the lhtrnsic value must be calculatled im the
tollowing order 1,00,000
Net Asiets available for Equity Shareholders 2,62,000
(ind the Net value of Assets as per fomat available to both shareholders te, preference and
qaily a c valuc per equity share Netasets available for equity share holders
Number of ejunty Stars
(a) Apportion the 'Net value of Asset to preference share holders
and equity share holders in proportion
ot their resechve caputals 2.62,000
30,000
ad Dvide the "Phoportional Net value ot Asies by respective number of share
Rs873 per Share
(o) While calculating the market
value of Aset, the ficttious assets like preliminary
expenses, Note: 1. Preliminary Expenses, Discount on Debentures and
Profit and Loss AsCOunt tloss) are tictitious acts
assets and
and
nderwnaing m s i , discount otSSe 0n shares and debentures. prit and loss account dett reallabie acsets So, they should not be taken into o t
balance etc. must be S d
Debenture Redemption Fund
libstzatien ldatrinsic Valae NMethod) is an accumulated protit and
deprectation fund Is a liability.
3. When depreciaton tund of ac
llouing ia the balaae ihet of Max CaLad as o 31.3.2003 white t a l Tited asets
Liables Ase tn the bookks at its original cost Hence
sharcholders; Depreciatian Futd mast be deducted. However, when market value of assets are given,
hue 00000 depreciatian fand neod not be deducted.
S0.000
S cac Cut Assets
0,000
Lastration2intrinsic Value Method)
he Balance Shett Ot Fast GirOw LId. as o0 31St March 2003
Debencrs 00.000Prot&LosA Aes
epreciane Fund Eived A
Sanay Cintos 00 Shares of Rs.100 cach 00.000
720000 Geaeal Re .00 Mainey
Proit and Loss e 000 vestmcas Co
i e e e t be dae
bgu S
for l
under t ses
m aher considerng be following inkomation Povi od
L2ebentue yeu 2U000 Dc
00000
c tSok Deso of whct k a l wbich
mat
w e dsbeal fr wich o
proviioc has bem
10.000
(&0. 2RM Aprl 1998) 443350
Addiienal Infocmation
Goodwill ia nlm ar
fa
Rs S000
Depreciate Machiaery e d
inccase Land and Baildg to RaLS000
c Poide SS wad haddees
2 0 i te soral of dividend declared
p d g agal bowever t e
Compuy coulid declae aaly 1 s i
Calclae e c valae af thures of the
Compuny
 cerporaleAccouin Valwstion of Sheres
Solution: 12
Caleulation of intriínsic value per share Solution:
Calculation of Intrinsic Value per Shar
Market value of AEeti; R
R3
Market value of Astett
S0000 Uoodwl
20,000
Machinery (1.00,000-10.000) 80,000 J0,000
Investment 90,000 Machinery (Rs65.000-Rs5000)
Debtors (1.00.000 8,000) 40.000 Patents
Stock 92,000
Cash
S4,000
Le: 1oal tiabilitieg:
10.000 5,02000
JetE Total Liabilinc
401000
Provision for tacation 20,000
Workimen's Savint Ale
Provident und ndy Creditors
1o,000 64,000
70,000
Net assets available for
Equity Shareholders 4,32,000 Net assei aailable far. Share Holders
L e Prelerence aharr.sHpital
44.000
30 000
Intrinsic value per equity share = vA.abie for cguity share holders
umber of equity shares
Net Assets available for Equity Shareholders 224.000
Calculation of Intrinsic value of each Equity Share
432,000 ntinsic valüie per equity share
000
Note: 1,
Rs.144 Per
Provident fund refers to the amount due from the co 2.24.000
So, if should bp deducted from the total valde of assets along
he workgnen. Itisa
biltie
iability kor the
company &000
2 Dvidends, eing an amount due towards cquity shareholiders, niced not be considered for deduction while = Rs,28
Calculation of tntrinsic yalie of each Prelerence Share
Calcufating Net asscts availabie to equity sharesholders'
Tilustration.3 (Intrinsic Value Method when preference shares have priority) Istrinsic value per preietence Total prelerence share capital
he follong 15 the Ealance Sheet of Sunate Lad, as on 31.122001: Number of preference shares
Ldb Rt
2000
.000, 64 Preference Shares of Ra10 cach ,000 35,000 2,000
u
8.000 Eauity Sharts of Re.t0 e
Reserve Fund =Rs.10
0.000 Patents
ote:
Prolfit & LosE AC 16,000 Stpck 28,000 1. woTkmien
sSavIng AccOunt relers o amount dac from the
the company 1o the wotkmen. it is
a liability tor the
Workmen's Saving C 15,000 Sundry Detbtors companty, 0, it shoukd be deducted trom the total values ot aASsets
along ith other liabilities.
Sundry Creditors 49,000 Cash . The Machinery was under
40,000 depreciated by Rs.5,000 therefore, the valuc of machinery should be roduced by
1o get s market value
EEmna capenies 6000 0
2.30.000 230.000
w a s discovercd that machincry was
under depreciatod by Rs5,000
2 Value of buidings is Ra. 30.000 and Goodwill is
3. Rs.6000 worth of debts are bad.,
R:20.0
4 The prefcrcnce sharcs have priority for capital repuyment.
Findout the intrinsic value of both types of shares.
(B.U. BBM. Now.1997)
 corporaie AcconnE
Valuation of Shares
(6) Calculation of average Capital Employed
Aunirnsic.yalue Method)
Market value of Assets:
20,000 and &Buildings 2.50.000
Lana o Juldie ant & Machinery
LTHed
5,000 Eouity sha c y Siock
5,00100 .50.000 Sundry Debo
3,30.000
Rs. 100 each fully paid andry Deblo0 1,55,000 J.00 9,05.000
Protit e Loss Alc
1,03,000 Rank ities
Sank Overdraft 20,000
Creditors
Perwijon for taxation Provision for taxation
Proposed Dividend 75,000 Proposed dividenu 5,000
2.17.000
8,204000 8.2
Capital Employed 6,88,000
Les: % of current
c compary arter dsdacting all working chasges and providing for depreciation and taxation
year prot 1
wCTe a 0 Average Capital Employed
0,40,3U0
Year Ended 31t March (e) Ccalculation of Norial Profit
Normal Protit
1997 85,000 Average Capital Employed x Normal Rate
of Return
96,000
10o0 6,40.500x
,00,1000 .64,050
(d) Calculation of Super Frot
On 31.3.2002, Land and Buikdings were valued at
Super profit
Average profit- Normal
»
Ka:2,30,000 and Pant and Machinery at Rs.1.30.000.
64,030
po
pu
u on e tanpbic capatal. For
y e s P s e ot the super-protits based on the average R.,130
profits of the last 5 years Calculate the intrinsic valuc. (e) Calculation of Goodwill
(B.0, B.B.M. April 200) Goodwill Super protitX NUmber oL
Solution: ycar s purcne
Calculation of Goodwill 29.150 x
)Calculation of average projn
Ra1,45.750
) Calculation of tarritrit valae per Sare
Averaje prois Calprofnts Rs.
Number ot e
Market alue of Arets:
4,66,000 1and 145.150
&
Buildings 2501000
RS.95,20

Plant &
Stock
Machincry
Sundry Debton
L LAabitiies: 1.55.0001050750
20.000
Creditors
Provision for taxation
Popoied drvidiend
75.000 7.000
Net asscts available for Equity Sharebolders R33750
 Carporale Accounting
Valaation of SAres 23
ntrinsic value per cquity sharc e- Total assets avaulable 1or equity share holders () 1000 Equity Shares of Rs. 100 cach, Rs. 25 called up 25,000
Nunber ot cquity shares
() 1.00 Equity Shares of Rs. 100 cach foly called up 1.00.000
,33,750 Reserve and Surplas 4,75.000
2,00,000
Gcencral Reserve S0.000
Rs.166.75 Per Share
Profit and Loss Account 250000
125,00
lastratlon S0ntrinsic Value Methol whien preécrenceshares hare no priority)
The following is the Balance Shect of lBangalore Trading Co. Lad.
On a fair valuation of all the auets of the company, it is found that they have an appreciation of Ra 75,0
he articles of asociation provided that, incae of liquidation, the prefcrence sharehlders will have a fürther
Balance Sheet as at 31.12.2001 Acertain the vae of cach prelercnce and cquily sat, assuming
co the etent of 1ofthe surl ae
guidation. Jgnore cxpescs of winding
Laabiities (A.CS. Punk, June >0
2.000 6% preference shares of Rs 100 cach 2,00,000 Fixed assets 3.00,000 Solution:
0.00 cquity shares of Rs. 10 cach
Liabilities
Curent assets 3,00,000 R
6.00,000
Lability lased Approach: 7251000
600.00 anpiie AsCts3re apatal+Keserei and Surplus
Adt: Appreciatioa of as5sets
The Market i e atsets is 109% cet value of current assets is 5% less than 5,00
value ott tkixed
more
book val Ae refeence
shares have no priority either as to
ASets 00,000
orded 1 Add: C Notions
repaymcnt of capital or dividend. You are requirdd to value the equity shar 0o0 Fasity Shares at Rs 50 per shat 50,000
(Bangalore Unirerity B,Cem Aprill7& 1995) .000 Equity Shares at Rs. 73 per share 75,000
Calculation of TntrinsC Yalne perShare
Les Preterence
share capital
6,25.000
Les quity share captal (uily paidj s x
. 10 incmase 3,J0009 10 325000
Curren assets 3,00,000 Lew: 10% Surplus transfermed to Preference sharecholders
Les: 5% dccrease 97
Surpius avalabie 1o cquiy snarehoiders
6.15,000
Calculation of Net Assets availabie to all qly
t o t a l Laabilinies:
uar p S.c,
LIat Net assets available for Equity sharcholders= 3,00000+2.92500
iability 000 1.05.000 =Ra:5,92,500
a rts available for both the class ot shareholders 5.10.000 ntnnic value
priority for repayment, the 'net assets muast be apportionod betweca pectereno per egquity share R.197.50
csholders and equity sharcholders in the paid-up capital ratio. Here, the prefercnce share capital is Rs, 2,00,000 and When these are partly paid shares, be assumod that the balance amount las bocn called up and fally paid-
is 23
cquity share
capital 1s 3J0,00. So, the ratio for distribution D Then, al the shares would become fully paid shares After calculating the intrinsic valud per fally paid share, the
sharehokders is Ra 5,10,000 ic, 2.04,000 and amouat available so trinsic value of partly paud share can be calcwilated. by uang te touowIRg tormia.
Thus the amount available lo preferenoe %x
J0,000
quity share holders is * RS. S,10,00
1e. Rs. Iarinsic valae per partly paid equiy ahare = lstinsic valbie per ftüly paid oquiy ahare - uncald apila per ahae
Therelore vaue per e
(a) Intrinsic value per fally paid Equity atares R.197
(a) Prcference share2 000 102 per unar (6) latrinsic value per Equity ahae of Ra 50 paid= 197.50-S0.00- Ra147.50
fe) atrinsic Valuc per Equity share of Rs.75 paid 197.50-75.00=Rs.122,50
(6) Equity share =Rs. 10.20 per share
c alue
per Preference
ustration 6. ntrinsic _Yalac Per ErelerencEaDd. Per Eoquity.sharesWhen thers.are Partlypaid 332.500
sharesl
he tolowing ligurcs were etitracied from the books
of Ma. Prosperous Lianited I1o.83
harcs ol Ra. 100 cach 00,000
S0,000
Tal 1 . 0 0 Eauity Sharcs of Ks. 10U CCh, RS. 0 Calicd up n
126 e AccoutiEa f
nlrinsic. alieMethost ehien parily-paid.shares are not.comerted into flly paid shares) Tlastcation3(atrinsie Yalue wit re sAdjustment-Whenthere isnediltrm
c St of Mh Sukn Caia Limited as on 31 March, 2002 aeYalie.oequity.and prelerenesisof as on MIarch 31, 2002
Batance Sheet WekLad.
Fized Azsets
C
s000 y pa 00wll 25000 Share capilal Sapdry assct 5,10.00
3.000 Equity shares of R 10 cach fully nai 6,001000 10.000, 66 preference shcs Discount on debentures
Equity tharcs of Rs. 10 cach, Rs. S paid s0.000 ve 75.000 of Rs. 10
c tauy 00,000 Preliminary expenses 30,000
an
Prott and Loss Ale 00.1000
Current Assets
00.000
Profit and Loss Acoou 4501000SCk 00.000 Debenture Redemention Fund 00
Carrent Liabilaties
7 debentures
eceivable
00.000 Bank Depreciacion fund 01000
Miscellaneous Ependitare Sundry crcditors 1,00,000
6,10,000 6,10,000
hd
700000 The sundry asscts are worth R 525000. One year's interest is owing o ds on
goodwll is valaed Xa 15100,
s afprefereace shares are in arrears for two years. You are required to value the shares on the Net Assets Method
33.000, SOck at Baldings # Ks 1200000, Machinery at Ra 30.000, Iavestments a
25000, Debtors at 1,40,1000. There was a
coetingent liability of Rs. 20,000 vent
e the valae
of different shares
Solutioa: o Preerence sharcs have no prioniy as to capital or arrears of dividend.
cuLaton of Net Vale o
c) Prcterence shares have priority as 10 payment of capital only.
14) Prelerence shares have priornily as to the payment
Goodswill of arrear of dividcnd only.
Solution:
Calcslation of net assets
Debtors 50.000
Receivable 5,25.000
Lbie
50,000
Sundry credi 3.S00
Outaideliabilanes 21.201000
1.0000
Orediers Net Assets available to shareholders 1,53.500
200.000 321,500
Contingent liability
Net assets 220,000 Calculation ol value of shares
avcilahle for shareholders
oal gty capital (paid p 9.001000
10,00.000
Net asets available to sharcholders
Unit valac of capital000 0 L e Prelcaence share 71589
capital 100000
Yale S . 20 paud
p hare 20X
Arrears of dividend
10 Ka S8.00
Net Auetr to cquitly oldens
L12.000
Vsle f e X 1 0 R 1520
Value of Rs. 5 paid up thare
T0Rs. 19.00
lotrinsic value
29900
Note: When
partly paid shares are aSsumed as not

ol per cqaily 3O000R &65 per share

preference t e have
calod tor, thes the aboE mcthod (6) When
can be followed. hine no prionig
Available
R 3,71500
to equity and preleren
ntrinsic
71500
value of per share noo Ka. 929 per share
Note: When there is no difference in the face value of
ecquity and przfierence shares, the intrinsic valoc can be ascertained
ogether(ie, l10,00+30,000 shares).
 Carporate Accountin Vale
(e) When
preference shares have
prionity ai Step 1Calculate Average Profits
lo capudal onl
p 2: Calculate Profits available for dividend
Net assets available to thareholders 71. S00
Lear Prelerence capital
Sep 3 Calculale Profits avalabie to cguity sharcholdens
et assets to
1J030
equity shareholders Step 4 Calculate erpected rate ot retum by uSIng tne tolcwIng CYuatiO
2.71.500
nrinsic value of per eqiy 271500 Rs 905 per a equity share 100
30.00 pecic Kate GE Retum a
(4) When preference shares have priority ar to dividend only :
Step 3 Calculate yield value of share by the 1ollowing cquation:
et asets vlabie to sharcholders 3,71.500
Le: Aears at
prelereoce dvidend for 2 years alue of share Paid sp ralue of cquity share
Normal rateof retun
Net Assets available to shareholders (equity and
prelctence) De foulowed to ascertain theE shares. In this book tirst
Note: Aty one ot
tne
above
methods can
valuie of cquity
Intrinsic value = R a 899 per share
40,000
Noe teret eity shares have different paid-upvalues, the total equity fund may be divided in properntion to air value per Share share and th
per prelerence share the
averge ot inirintic
value per
o O erent groups of shares,and such amosnt should be divided by the number of thares in each Ihe rair valDe or cquity snare, s
E preier r e partucipating Uhe exces ot pet atsets less petlerence capital over the paid Tarket price per share. It can be calculated by ustng the forrmula.
lo their
y proporbon
hare of canital snd then he
Fair
valae per share SENloE per shire
2
2 Since Market value of asets are piven, depreciation fund need not be dedacted in the calculation of Net Assets
available to shareholders
tlustration 2.tErohem.undetied.etha
From the lollowing information, calculate the value ot an cquty share under yieid method.
QYield Method
ould of its Asset consnts Of 1000,
15 pretcrence shares ot RSIO0
Cac
e nt forealeulation of the value of the shares. 1ne pad up
shate
capital ot a cormpany
The m and 20,000 equity shares of Rs,l0 each.
Under this method, the profits available for cquity dividend are taken into account while calculating the valüe
(2) The average annual protit ot the cofmpany, aer pov
of each equity sharc.
to Rs.75.000, It is considered necessary to transter RS.10,000 10 Genermi e c e o e t o r e a c
Lhe 1ollowing steps are to be taken into account while calculating the value of each Equity Share.
dividenid
on the basis of the availabie data,
Step1:Calcuate the average profits of the cormpany after ) n e noriial r e t u n Cxpecicd by investors on cquity shares trom this type ot business
caried, on by
Step 2: Calculate thesprofits available for dividends dedacting provision for tax and variauS
towards reserves
e company s u,
(Delhi, B.Com, 1980)
Step 3: Calculate the profits available for equity dividends by deducting the dividends, payabie to0
preference shareholders. Solution:
Yield Method:
Step4: Calculate the Capitalised profit by uing the formals Step 1. Calcalation of Average Profits
Rs.75,000
apitalisod profis ate of retun
Average annual profits
Nomal Step 2 & 3. Calculaion of profits available Jfor dividends to cquity shareholders
the formula.
Step 5: Calculate the market valüe of each Equity Share by using
and 1a3)
Average prolfits the company (after depreciation
ot
Market valuc per shaee c prnt
Namber ot c Les: ralnuer 1o Ueneral Reserve 100
65,000
Note: Step 2 and 3 can be clubbed, Profits available for dividend
Les: Prelerencial dividend (1S% of Rs.1,00,00)
Alternative Method 50,000
1he Profits availabie for cquity sharcholders
out valuc of cquity shares under yield method.,
An allemative method can be tolowed to Tind the
following steps may be followed for calculating value of shares:
 alaaien of hares
erperaie cesaniing
Step 4. Calculation of Capilalaed Frofas
Yield Methed)
lastcation.10.dntcinsic Value.and
olowg panculars af
AtLLamuled
Capitalsedd profits
p xt00
4,001009
100 unent Liabilities
Cuneat Aue 200.000
R1.5,00000
ted Assets 50,000
Step S Calculation of Market Value per Share
50,000
Market value per shat s for the last three yeas were E31.00 K a n d 5.31,0S0 respectively. a asteru o
r f C o m p e l e dhe value of Shares under:
Y
(R0. R.Com. Nov. 1999)
Alternative Method Solution:
eAter
r Mecho
Calculation ol Intrinsic value
per share
Average annual profits .7,000
Stey 2 4 3. Cakculation of profis arailaie for dividend to equiy thareholdert dariet value of Ausec
ited Asets
50.000
Curtn 00.000
Average jprofit (after depreciation and Tat)
Lesr:. Transfer to General Reserve 10.000 au: Total Liabilities: S0,000
Profits
available for dividend e 00.000
L e Prelerencal divend (39)
65,000
Net Aauets availale for
Profits available to nquity shareholiders
Equity Sharholden
000
sble fe
Step 4. Calkculation of Expected Rate of Retur
ois zra x00
Equity C 40.000
Rs.14.25 per
so000
Yield Method
0000
a) Cakculation of Arerage Preft
25%
Suap 5. Calkwlation ef Value per Equily Shar Average profit
wAt per oquy ahat x Paid -vg valie of equity hwe S1460+52.00 51650
1OMalo
R25 RES1,750
Note: Any one ot the abovE methods can be folowea to icertan the valuc Ot shares. In this bock firnt
method
is gsed throughout
 Carporate Accounling Valustion of Shares 133
Solution:
) Calcalation of Profis aailable Jor Dividend to
Equity Shareholders Net Assets Method
Calculation of Tntrinsic valiue per Share
verage profits of the company
Less: Transferred to Reserves (51.750 x 204)
Eros availahle for Equity dividend e Preference Share Capital (450x 100)
Equity Share Capital (4.500 x 10)
J000
(e) Calculation of Capidalised Profits
Capitalised profits n t to cguity share holders 1 Tetal Liabilities/Total Asucts 1.01.000
Normal rale ot return
Cbous Asets 350
100 1.00.650
es: External Liablioes
Rs4,14,000 Net Assets available for Shareholdecs 93,150
4 Calculaton of the market vaiut per Sare e : Prelertnce Share Capital
ssets vailable for Equity Shareholder 45,150
Capitalised roti t
Market poee paat
Number of equity thares Intrinsic valae per oquity share LI TOr cquity share holders
Number of cquity shares
414,000
40,000
R10.39
4500
Tilastration1intrinsic Value and Yield .Methed) Yield Method
in relaio to x
h e toliowing paticulrs ar avaaie L
( Capital, 4S0,6 preference shares of RA.l00 cach fullypaid and 4,500 qaity shaees of Re.10 cach fely paid. (a)Calcilation of Profius evalable for dividend to Equity Shareholder
s verage profits after taxation
Le: anster to Reserves (8.300 x 104) gen
(ahrs
e Lompany KE8.00.
yO
uyres (fully paid) of the Sae type of companies Profits available for dividend
Leu: Vreference dividend (43,00 x 69)
7.650
o
Profits available for Equity Sharcholders
(i) 10% of the proits after tax cach year is ransierned tao reserves 4,950
b) Calculanion of Capitalised Profits
the intrisic and tie value per Equity share according to yield busis Assume that
Calculate value Equity Share
per
ut of total ansct, assets wocth 7a350 re 1ictitioas
capitalised
Capitalised profits
protis =
y areholdersx100
t0
CS-Inier, 1989) Normal rate of return
S100
5J000
(e) Calclation of Market e per Capitalc
Number of equity shares
000
4500
 Carporaie AccouRtE Yal nation ofShares
134
available for dividend 1o Eqiy Shareholde
() Calcalaion of profi1
lilestration12 ntcinsic Val1ue and Yicld Methed)
mpute t e valoe of shares by the 82,000
Average profits of the Cormpany
(0 Net Asets Method Les: Transferred to Reserves (82,000 X 2 0 )
(ü) Yield Method, from the following Balance Shet of a Limitcd Company as on 31.32
Profits available for Equity Dividend 65,600
BalanceS
Liabilities Aet (o Calcalation of Capisalised Profits= Profitsavailable for cquily ur
Normal t e
100
000 Sares ot Ks. i0 cach 8,001000
10,00,000 x100
Profit & Loss Alc
S0,000 Current As 4,00,000
S Debentures
Rs.6.56.000
Creditors
(d) Calculation of market vale per Share
14.50.000
Market price per
Capitalised Profits
On
3132003 fixed assets were aluc atl 000 and Goodwill at Rs.75.000. The net profits for the last three Number of equity sheres
years were Rs75.000, Rs.78.000 and Rs.87,000 of which 205 was placed to reserve. The rate of return is 10%.
(8.0. B.Com. April 1999 656000
10.000
Solution: Rs.8.20 per share
Net Asset Metbod
Calculation of Intrinsic value per Share 1slration3ntrinskc.Yatue.andYicld Method
R From the information given below and the Balance Shet of A Lid. on 31st December 2001. find the value ofis
Equity Sharcs by intrimsic valae method znd yield method.
Market vale of Assern:
(a) Company's prospects for 2000 are good;
Goodwill
4b) Buikdings are now worth Rs.3,30.000,
4.00.000 1675.000
" n e a e ot KESO,00O, The annual tratsfer to reserve
Less: Total Liahilities
Debeatare 001000 (d) Preferential Shares have pecference as to Capital and Dividend;
0 500000
Credilo (e Normal tate of returm eipected is 159%
Provision for tax
Net Assets availabie to Equity Shareholden
T165900 Balance
DC TOT Cquiy snare holoe
Liabilities R Asets R
Intrinsic value per cquity share = 0, 8 referential Shares 70,000
Number of cquity shares 1,00.000 Beidings
ot Ri.100
cach Tuly pan Furnitare 3,000
11,75,000 4,000 Equity Shares of 4,00,000 Stock (Market value) 50,000
y paid 3,35.000
80,000
150900 DeA00.00
Debeors
Rs.14.69 Profit & Lo5s VC: ,80.000
eld Method 80,000 ank
60.000
Add: Protit 10r 1 9 430,000 Preliminary Expense 10,000
(a) Calclation of Weighted Aeruge Profe
Year ehs Prodwc Creditors 48,000
SJ000
12,08,000 | 12.08.000
18,000 (CS-nier
87,000
92,000
RE 49200
Weighted Average ron 6
Rs 82.000
 Cerperate Accountin latio of Skars
Solution:
Net Asset Method 3Earning Capacity Method
Calculation of Intrínsic value per Share Sometimes the rate of dividend delarcd by a company much lesthan
t h e rate of carnings of the
company because of wrifing off of accumulated losses and also retention of profíts.
Market value of Anet: eaming capacity method is an improvement over the yield method and it gives the proper value of
Building
The
EquityShares
.50,000
Under this method, the following steps are to be followed for calculating the market value of shaes
50.000 Stcp1: Calculate the rate of carmings of the company by using the formula.
Investments
Debtors
Bank Rate
Rate of earniugra
of car 108
60.000 Capiol enpie
Total Market valuc of Assets
Less: Total Liabilinier: 4,78,00
Creditors
Step2: Calculation of market value per share
45000 The markct valuc per share can be calculated by asing the formulae.
Net Assets zvailable for Shareholdens
14,30.000
Ler 8 Peterence
Share Capital
Net Asscts available for Equity Sharebolders
100000 murket vale per s h a t e o l mXaid spvaie per share
3,30,000
ntnnaic value per equity share Cguiy sMhare holders
Number ot ejuny aiu
TilnstrationJIntrinsicValue. Yield Method and Eair Market ValueRer.Esquity Share)
FollowingE In the surmmaried Balise Shetr of XLad au os 313 2002
B35000 Liohilities
4,00 4000 Shares of Rs.10 each 400.000 Goodwill 000
KeserveFund 1,00.000 S0000
= Rs332.50
Pro & L o AC
Yield Method
(a) Calcwlation of Profits availabile Jor diidend to Equiy Shareholders Curnent Liabilitics 1,30,000
7,65.000 65,000
f o r 2001 30 Füc the purpose of valuation of Share, Fixed Ausets wcre valued 'e Rs5.00.000 and Goodwill at Rs1.50000
d increase 50.000 here it necesity of RBlD.at l00 Debiors of Rs7.00s fosnd that sock wa over walied by Ra9.000. The
a
nee p r t tor thiee yeas were K t 0 , K 7 1 0 and 0 2 0 respecvely ater tatation out al this profit 205 wa
4,80,000
Les: Tcansferred to reserves (4,80.000 x 2590) portion beinE couidered reasooasic in tahc industy ie which the company is engaged sod where
Protits available for dividends 9.601000 value of cach
Compute the Equity Share by Assets Method and Yickd Method and also calculale the
1at v
Lea: Preterence dividend ( x S)
Profits zvailable for Equity Dividend 3.32000 (B.0. B.Com. Nor.2000, Nor, 2003)
() Calcalation of Capitalied Profts Solution:
Capicalised profits= vaulabie for cquity dividends
Normal rae

Net Auset Method

Calculatioa of Latrinsie value per Share
352.00 100
KE2346,667
Goodwill 1500
ucd Act
(e) Calculation ef Mariet valae per Share co (1,90.000-7500-9.000)
23.00
Markt price p apitalicd os Total Liabilitier
Number of cquity
shercs
Debentures
Curent Liabilities
4000 Net asucts available for Equity Sharcholdens 93.500
S86.67
138 Corporate Accounting Valaation of Shares
Intrinsic valiue per equity share= Illustration 15(Intrinsic Value, Yield Method and Eair Market Value PerEquity Share)
Number Ot cquity sniaics Balance Sheet of Djamond Ltd. as on 31.12.2002.
Liabilities Assets
5.93500
40000 Share Capital: Land &Buildings
= Rs.1434
SSues, Subscribed and 00.000 Plant& Mac
aid up: 2,000 shares atents&Trade Marks 130
Yield Method
fRs 100 each tock
(a) Calculaton of Averuge Frofts General1Reserve 40,000 Debtors
Profit & Loss NC ank
Average pro Total profits Sundry Creditors
Numbet ot
yeas Income ta reserve 28,000Preliminary cxpenses 12.000
60,000
231000 4,60,000 4,50,000
The expert valuer valucd the land and buildings at
Rs.2,40,000, Goodwillat
Rs.1,60,000 and plant and machinery
71.00 at Rs.1,20,000.Out of the total debtors, it is found that debtors
of Rs8,000 are bad. 1he
6) Calcilarion of profis available for Dividend 2s folow protits ot the
company have
2000 90,000
Average protits of the company 80,000
7000
to
erted reserve .000 x 205), 15,400 1,06.000
Profits available for Equity dividend The company follows the
61500 practice of transfeming 255% of profits to
general reserve. Similar type of aompanics sab
() Calalation of Capitalised Profits t 10% of the value of their shares.
Ascertain the value of shares of the
company under
(9 ntrinsic value method;
Capitalised profits= VL malTOR Cguy dividends10 (ü) Yield value method;
() Fair value
x100
method.
Solution: CS-Tnter, Dec. 1991)
Rs6,16.000
(d) Calculation of Market value per Share Net Assets Method
Caleulation ot Intrinsic value
per Share
Market price per share =,
talised Profits
Number ot cquity s e
Market value of Atsetr:
6l6,000 Land and Bulding
40,000 Goodwill 40.009
15.40 1,20,000
Stock Marks
() Calalation of Fair valae per Equity SAure zU,000
48,000
Debtors (88,.000- 8,000)
Inrindicvalue per equity ahare0 c i available for cquity share holder Bank 80,000
$2,000
Les: Total Liabilities: 1,20.000
1434+1540 Sundry Creditors
Income tax 1,28000
= Rs. 15.12 60,000 1.88,000
Net assets available for
Note: The reserve for doubttul Equity Shareholders
bad
debts should not be deducted whule
calculating the average profits. lt is only the actual 532,000
debts ynten ott mustbe
Bdjustcod while calculating the average protits of the company.
1 2 - 7
57
3 S
 Valuation of Shares
Carpornte Accoang
YicldJMethod and.Earning.Capacity Method
Tor equity share holders Illustration16 (Intrinsic Valus.
per equity share
=
Balance Sheet of a imited company reveal ne tolowinE Po
Jiic alac Number ol cjuiy r e s
O March 31, 2002, the R
Liabil 4,00.000 Fixed assets S00.0
in Ra. 10 shares
2000 ssucd capital 90100 C u r e n t assete
Reserves 200 Good will
Rs 26 Profit & Loss AC
00,000
ield Method
130.000
urent liab
f i t i e s
(al Calcilanet of averate projnis 140000
T40,000
Ra. S0.000.
3.50.000 and the goodwill
at
ANege prots
ixed assets were indepen 2 000o 2002-R 51.650 of which
20
2000-RES1,000, 20 industry in which the company t
0 B000+2306.000-8D00 was placed under reservc, this proporon eng shares by a) the Net A e t
ute the value of the company's
and where a fair invet Tekthe Earnind Capacity method
Capacity method
and tc;tne.Earning
Yied value mcthod
200l & May 2002 Modifed)
ncthod, t0) the
268.000 (CA and B.U, Nor.
3
Rs.89333
(b) Calclanion
ef profits available for dovidends Solution:
(a) Net Assets Method
9,333 shares Market value of Assets
of the compar Calculation of latrinsic value of
e d to reserves (89,333 x2) 22.333
alance Shoet
ts aaaic
lor Equity Shareholders Cument assets a s
per
Market value of fixed asicts
acao iredprofit
Cepitased nrofit Goodwill (4S per valuatc00)
6,000
Profits av EC x100 Toral market value ot asses
Capitalicdprotrts Lea: Total Liabilities
00.000
0000
6700 00 ent liahilitics
630 yI335 Net valuc of assets availabic
to shareholden or capal cppoy
70.000
Net valae of aseti availabic fo sharcholde
Calcalation of Marker value per Sha Intrinsic vale per ae
Number of equity s
(4)
Market poct prr Capitalised prots
Number of cqaity shats 395,xIn=33 1700
40,000
2.000 R 93
(b) Yield Melhod
(0 Calcuation of e Profils
Fair Valae Method Toal pront
Average po Number of ycan
market
S1600+32.000+51,650
2
R30030 of the
Note: The actual bad deas
reun of mul te 06daciad
re t e total prolfits while Calculating the avcrage protits 15.250
Rs51.750
 Ptoch Panarutri
LIS MCO
ro-04a1nalTr Corporate Accounting
Valaation of SAre
142 Section B Type (Questions
(4) Calculation of Profits available
to
Equity Shareholders
31st Dexember, 2001
toONIng S he Balance dheet of A Company Ltd, 25 on
51,750
Average pro 10350 Liabilies 2.000
efered to reserve (51.750 * s,000 E q u i t y S r e s or
3,00.000Cash in hand
20,000
41400 Cast at Bank
Profits available to Shareholders
Preference Shares 1.50,000 Sundiy Debeors
Profits
()Calculation of Capitalised Stock-in-Trade
of Rs.100 each 05,000
EOEhareboliders
40.000 Land & Buikding
a Normal x100 General resee 30,000
Capitalisea
Capitalised pprofits= tale 10.00
rotit 70,000
A140 ang Loan 15.000 Discount on Sharc 18.000
100 Sundry Creditors
10 5,65.000
4,14,000 as foliows
e value of assets is assesied
value snare
(iv) Calculation of market per
Furmitaure to be depreciated at
l08.
estimated at Ra1,20,000, Rs2.50.000 and
and building and goodwill is
Market pricP Capitaitcu pS 2 Value of stock-in-trade, land
Number ot oqy s Rs30.000 respectively
806 of book valoe
Debiors are expected to realise
414.00 3
Fndout value ot Equity sthares.
40,000
(B.Com. M.: UReri
RE1059 per share
116
e) Earning Capacity
Method
F r o m the toilowing detals find ost the valuc of cach cquity share
Calculation of rate of Earnings
(
Balance Sheet as arSla
Ratc of ng
earmiCapital x100 R AE
empioy
6,00,000Premises 1.50.000
S1:50 x100 50,000 Plant 2.50.000
3,70.000 &L Alc. 40,000 250,000
S,000
145 Provident tu Depot
5.000 Cash at bank
Creditors
(4) Calculation of Market value per Share 15,000
Depreciatioa resere
Provision lor kation
up value per share
Market price per share
ormal Rate of RehmPaid 8,60,000
Adjustment:
Goodwill is worth Ra. 80,000
RS.14 per
Depreciation reserve is in eceis to the extent of Ks. 30,00
EXERCISES Debtors of Rs. 10,000 are likely to prove bad.
provided in the accounts) out of which Rs. 10,000 is liked
to
4. There is a disputed fiability of Rs. 15,00 (0ot
Secton A 1ype Questions
materialise
(Ans: Internsic valuc of share = 19.50, Net value of Assets Rs,780,000)
What is meant by Valustion of Shares? 4 lHahiliy
what are the circumutances under which shares are valued?
S t a e the different methods of Valuation of Shares
4 What are the tactor that intloence the valuatio of Shares?
Ses
5. Statc the reasons for the valuation ot
How are the Shares valucd under Yield Method?
6 What is the meaning of the ferm
yieldy
tiow 15 t Calcuaica?
uueand oy the ce nuntac valuer
n a t
do you