Valuation of Shares

Valuation of shares refers to periodic updating the price of shares. A share is defined as A share is a share in share
capital of a company. It is a proportionate part of the share capital and forms ownership in a company. The term
valuation of shares also refers to the process of ascertaining the intrinsic value or the market value or the fair value
of the shares of the company.

Circumstances necessitate the valuation of shares

1. At the time of amalgamation or absorption for adjusting the rights of shareholder

2. When a large block of shares is purchased so as to acquire controlling interest in a company
3. When shares of one class are converted into shares of another class
4. For wealth tax purpose
5. For determining security margin, when shares are offered as a security for loans and advances
6. For determining amount payable to the dissentient shareholders for the acquisition of their shares, when a
company is sold to another company
7. When company is taken over by the government
8. For the valuation of the assets of finance or investment companies

Factors for valuation of shares

1. The nature of the business

2. General economic conditions in the country
3. Companys earning capacity
4. Political conditions in the country
5. Capacity of management
6. Goodwill of the business
7. Progress of the company
8. Nature of competition
9. Reserves of the company
10. Dividend declared by the company in the past

Methods of valuation of shares

1. Assets Backing Method, Net Assets Method, Balance Sheet Method, Intrinsic Value Method or Break-up
Value Method
2. Yield Method, Dividend Yield Method or Market Value on Dividend Yield Method
3. Fair Value Method
4. Earning Capacity Method or Market Value on Earning Capacity Method

Assets Backing Method or Intrinsic Value Method

In this method the value of equity shares of a company is calculated on the presumption that the company would be
wound up. As it is assumed that the company would be wound up all its assets would be realized for the calculation
of the value of shares at realizable or market value. From the value of all the assets, the total amount of all the
liabilities payable to outsiders will be deducted. The balance is the value of net assets available for shareholders,
then the total paid up preference share capital and arrears of preference dividend, if payable should be deducted.
The resulting balance is value of net assets available for equity shareholders.

Particulars Amount
 Goodwill Xxx
Land & Building Xxx
Plant & Machinery Xxx
Vehicles Xxx
Furniture & fixture Xxx
Patents & Trade marks Xxx
Investment Xxx
Prepaid expenses Xxx
Outstanding incomes Xxx
Stock Xxx
Debtors Xxx
Bills receivable Xxx
Cash in hand Xxx
Cash at bank Xxx
Less: Creditors Xxx
Bills payable Xxx
Bank overdraft Xxx
Outstanding expenses Xxx
Incomes received in advance Xxx
Workmens savings bank deposits Xxx
Provision for tax Xxx
Outstanding dividends Xxx
Outstanding debenture interest Xxx
Unclaimed dividend Xxx
Workmens compensation fund Xxx
Depreciation fund Xxx
Bank overdraft Xxx
Net assets available to shareholders Xxx
Less Arrears of preference dividend Xxx
Premium on redemption of preference shares Xxx
Preference share capital xxx
Net assets available to equity shareholders xxx
Intrinsic value of equity shares = Net assets available to equity shareholders
Number of Equity shares

Yield Method
This method, assumes that the company would continue to exist and would not dispose of its assets, the market
values of assets and liabilities are not taken into account for calculation of the value of the shares. In this method,
the profits available for equity dividend are taken into account while calculating the value of each equity shares.
Step 1: Calculate the average profits
Step 2: Calculate the profits available for dividends after deducting provision for tax and various appropriations
towards reserves
Step 3: calculate the profit available for equity dividends by deducting the dividends payable to preference
shareholders
Step 4: Calculate the capitalized profits
Capitalized profits = Profits available for equity dividends X 100
NRR
Step 5: Calculate the market value of each Equity shares
Market Value per share = Capitalized Profits
Number of equity shares

Fair value method

Fair value per share = Intrinsic value + Market/yield value
2
Earning Capacity Method
Generally the rate of dividend declared by a company is much less than the rate of its earning because of retention
of accumulation of profits. Since the retained, accumulated or undistributed profits are likely to be distributed
sooner or later to the shareholders in the form of bonus shares, it is appropriate that the market value of shares is
based on the earnings of the company rather than the dividend declared by the company.

Step 1: Calculation of rate of earnings

Firstly calculate the average profits then to the average profits add interest on debentures

Step 2: Calculation of Gross capital employed

Gross capital employed = Assets- liabilities to outsiders (Dont deduct of current years profit)

Step 3: Apply the following formula to get the percentage of earnings

= Total rate of earnings x 100
Capital employed

Step 4: Calculate market value of per share

Market value = % rate of earnings x paid up value of shares
Normal rate of return
Problems:(Intrinsic Value method)

1. From the following B/S calculate the value of equity shares under intensive method:-
LIABILITIES AMOUNT ASSETS AMOUNT
1000 8% preference 1,00,000 Land or Buildings 10,00,00
shares at .100 each Plant & Machinery 1,50,000
30,000 equity shares 30,00,00 Furniture 1,50,000
at the ratio of 10 each Current Assets 2,50,000
Reserve fund 50,000 Preliminary expenses 20,000
10% debentures 10,00,00 Discounts on
Depreciation fund 10,00,00 debentures 5,000
Creditors 70,000 Profit/Loss A/c 45,000
7,20,000 7,20,000
The following information is to be considered:-
Debentures interest is due for 1 year
Current Assets includes Book debts of .12,000 which are doubtful and no provision has been made:
2. Following is the Balance sheet of a company as on 31/3/99.
LIABILITIES AMOUNT ASSETS AMOUNT
Equity shares at .100 each 30,00,00 Land & Buildings 1,50,000
General reserve 50,000 Machinery 10,00,00
P/L A/c 25,000 Investments (market value
Creditors 40,000 40,000) 45,000
Provision for tax 20,000 Debtors 10,00,00
Provident fund 10,000 Stock 40,000
Cash 10,000
4,45,000 4,45,000
Additional information: Goodwill is to be taken at 50,000.
Depreciate machinery at the rate of 10% and lands & buildings is revealed at 1,80,000.
Provide 8% towards bad debts.
Calculate the value of share by Asset backing method.
3. Following is the Balance sheet of a company:
LIABILITIES AMOUNT ASSETS AMOUNT
 5000 equity shares at .100 each 5,00,000 Land/ Buildings 2,20,000
P/L A/c 1,03,000 Plant & Machinery 95,000
Bank overdraft 20,000 Stock 3,50,000
Creditors 77,000 Debtors 1,55,000
Provident for tax 45,000
Proposed Dividends 75,000
8,20,000 8,20,000
Adjustments:
Net profits of the company after deducting changes, provision for appreciation and tax are given
below:-
1995 1996 1997 1998 1999
85,000/- 96,000/- 90,000/- 10,00,00/- 95,000/-
According to the nature of business it is considered that 10% is reasonable return on capital employed.
For the purpose of valuation of shares, goodwill is calculated at 5 years purchase of super profits
based on Average profit of last 5 years.
On 31/3/2000 Land & Buildings is valued at 2,50,000, Plant & Machinery at 1,50,000/-. Calculate the
intensive value of shares.
4. Following is the Balance sheet of a company:
LIABILITIES AMOUNT ASSETS AMOUNT
20,000 6% preference Fixed assets 30,00,00
shares at rate of 10 each 20,00,00 Current assets 30,00,00
30,000 equity shares at
the ratio of 10 each 30,00,00
Current liabilities 10,00,00
6,00,000 6,00,000
Adjustments:
Market value of fixed assets is 10% more than book value; market value of current assets is 10% less
than book value.
There is an unrecorded liability of . 5,000 which is assumed to be current liability. Assume that
preference shares have no priority either for repayment of capital and dividends. You are required to
value both equity shares and pr. shares
5. Following is the Balance sheet of a limited company as on 31/03/99:
LIABILITIES AMOUNT ASSETS AMOUNT
30,000 equity shares 6,00,000 Goodwill 25,000
of .20 each fully paid Buildings 6,00,000
up Machinery 3,75,000
25,000 equity shares 2,00,000 Investments 50,000
at rate of .20 each, Stock 30,000
.8 paid up Debtors 1,50,000
15,000 equity shares 1,50,000 B/R 50,000
of .10 each fully paid Bank 1,30,000
up Discount on shares 20,000
10,000 equity shares 50,000
of .10 each .5 paid
up
Reserves & Surplus:
General reserve 4,50,000
p/l A/c 50,000
Creditors 2,00,000

Adjustments:
Goodwill is valued at 15,000/- Buildings at .12,00,000 Machinery at .3,00,000.
Investments at .35,000, stock at .2,50,000 Debtors at .1,40,000 and there was a contingent
liability of .20,000.
Determine the intrinsic value of different types of shares.
6. The following details are obtained from a company as on 30/06/2004:-
 Share capital = 10,000 equity shares at rate of .10 each fully paid 1,00,000
10,000 equity shares at rate of 10 each, 7.50 paid up 75,000
10,000 equity shares at rate of 10 each .5 paid up 50,000
General reserve 50,000
Creditors 25,000
Bank O/D 50,000
Other current liabilities 50,000
Land & Buildings(market value = 80,000) 30,000
Plant & Machinery 50,000
Furniture(market value = 50,000) 40,000
Stock 20,000
Bank balance 1,00,000
Debtors 1,00,000 Calculate the
value of each type of
share under Asset backing method (excluding goodwill)
7. Following is the Balance sheet of a company as on 31/03/97:
LIABILITIES AMOUNT ASSETS AMOUNT
30,000 equity shares at .10 Good will 70,000
each fully paid up 3,00,000 Fixed assets 4,50,000
10, 000 equity shares at .10 Current assets 2,20,000
each . 8 paid up 80,000 Preliminary
Reserves 1,80,000 expenses 10,000
11% debentures 10,00,00
Current liabilities 90,000
7,50,000 7,50,000
Adjustments:
Goodwill is valued at 50,000 other fixed assets are valued at 4,20,000. There was a contingent liability
of .20, 000 which became payable determine the value of share underI.V method.
8. Following is the Balance sheet of a company:
LIABILITIES AMOUNT ASSETS AMOUNT
10,000 6% preference shares at Sundry Assets 5,10,000
rate of 10 each fully paid 10,00,00 Discount on
30,000 ordinary shares at the debentures 10,000
rate of 10 each fully paid 30,00,00 Preliminary
Debentures redemption fund 30,000 expenses 30,000
7% debentures 50,000 P/L A/c 60,000
Depreciation fund 30,000
Sundry creditors 10,00,00
6,10,000 6,10,000
Sundry Assets are worth .5,25,000.
1 year interest is owing on debentures and dividends of preference shares are in arrears for 2 years you are required
to value the share under net asset method if:
Preference shares have priority as to repayment of capital and dividend
Preference shares have no priority as to capital and dividend.
Preference shares have priority as to payment of capital only.
Preference share have priority as to payment of dividend only.
9. Following is the Balance sheet of a company.
LIABILITIES AMOUNT ASSETS AMOUNT
20,000 6% preference Fixed assets 4,00,000
shares at the rate of 10 each 20,00,00 Current assets 2,48,000
30,000 equity shares at the Preliminary expenses 10,000
rate of 10 each 30,00,00 Under writing discount 5,000
General reserves 5000 P/L A/c 27,000
Debenture redemption fund 25,000
 Investment fluctuation fund 10,000
5% debentures 50,000
Depreciation fund 10,000
Sundry creditors 90,000
6,90,000 6,90,000
Current assets include investments of . 50,000, market price of which is .48,000.
Debtors included in current Assets are doubtful to the extent of Rs.5,000 for which no provision has
been made.
Stock at the end did not include a return of .1000
Debentures interest is due for 1 year and preference dividends are in arrears for 2 years .
You are required to value the shares:-
Preference shares have priority as to capital and arrears of dividends.
Preference shares have priority as to repayment of capital only.
Preference share have priority of arrears of dividend only.
Preference shares have no priority as to be capital and dividends.
10. Following is the Balance sheet of a company.
LIABILITIES AMOUNT ASSETS AMOUNT
Equity shares at rate of 10 each 20,00,00 Land & Buildings 3,00,000
6% mortgage debentures 50,00,00 Plant & Machinery 4,00,000
5% bank loan 20,00,00 Stock debtors and B/R 40,00,00
Current liabilities 40,00,00 Investments 10,00,00
P/L A/c 20,00,00 Bank balance 20,00,00
Preliminary expenses 10,00,00

15,00,000 15,00,000
a. In the net profits of .20,00,00/- the following adjustments were not provided:-
Interest on 6% mortgage debentures for the year ending on 31/3/05.
Interest on bank loan for the quarter ending 31/3/05
Bad debts of .20,000 and dishonor of bills .10,000/-
b. Market value of Assets are given below:-
Land & Buildings - 400000, Plant & Machinery - 600000
c. Stock in trade valued at cost is less by Rs,5000 as compared to the market value on that date
d. Market value of investments is Rs.117500 Find the intrinsic value of shares
11. Balance sheet of a firm is given below
Liabilities Amount Assets Amount
5000 shares of Rs.100 each Land & building 220000
P/L A/c 500000 Plant and machinery 95000
Bank overdraft 103000 Stock 350000
Creditors 20000 Debtors 155000
Provision for tax 77000
Proposed dividends 45000
75000
820000 820000
Net profits of a company after deducting all charges and providing for depreciation & tax are given below
2000 2001 2002 2003 2004
85000 96000 90000 100000 95000

On 31 December land & buildings was valued at 250000 and plant & machinery at 150000 according to the nature of
business it is considered that 10% is reasonable return. Prepare valuation of company shares, taking into
consideration the revised value of assets and goodwill based on 5 years purchase of super profits.

12. Following are the Balance sheet of A Ltd. And B Ltd. As on 31.12.04
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
 Shares at the rate Fixed assets 60000 32000
of Rs.1 each 100000 50000 Goodwill ---- 5000
P/L A/c 24500 6000 45000 shares in B
Debentures 20000 ---- Ltd. 60000 ----
creditors 7500 3000 Current assets 32000 22000
152000 59000 152000 59000
1. Fixed assets of A Ltd. And B Ltd. Are valued at Rs.71000 and 36000 respectively
2. Valuation of goodwill is NIL Find out the intrinsic value of shares of both companies
13. Following is the Balance sheet of a company
Liabilities Amount Assets Amount
80000 Equity shares of Goodwill 100000
Rs.10 each 800000 Land & building 600000
1000 6% preference Plant & machinery 300000
shares of Rs.100 each 100000 Stock 150000
General reserve 250000 Debtors 150000
5% debentures 100000 Cash 40000
creditors 100000 Preliminary expenses 10000
1350000 1350000
1. Normal return on capital employed for valuation of goodwill is 10%
2. Land & buildings are valued at 700000 and plant and machinery 280000
3. Goodwill is to be valued on the basis of 3 years of super profits
4. Profits and losses of the company for past 5 years are given below
Years Profits Losses
2000 180000 -----
2001 260000 -----
2002 ---- 40000
2003 ---- 20000
2004 130000 -----
Companies engaged in similar business are paying 12% dividends on equity shares. Ascertain the intrinsic
value of equity shares.
14. Balance sheet of a company
Liabilities Amount Assets Amount
8000 8% preference Goodwill 50000
shares of Rs.10 each 80000 Land & buildings 100000
10000 Equity shares of Plant & machinery 100000
Rs.10 each 100000 Stock 50000
8000 Equity shares of Debtors 30000
Rs.10 each Rs.8 paid up 64000 Cash at bank 4000
Reserve fund 50000
P/L A/c 30000
creditors 10000
334000 334000
For the purpose of valuation of shares goodwill should be taken at 4 years purchase of super profits and land
& buildings is revalued at 150000
Average profits of the company are Rs.80000. Assume that 10% is reasonable return on capital employed.
Ascertain value of fully paid & partly paid equity shares.

Yield Method (with other methods)

1. Following is the information given below
Equity shares at Rs.10 each Rs.400000
5% debentures Rs.100000
Current liabilities Rs.130000
Current assets Rs.200000
 Fixed assets Rs.550000
Goodwill Rs.50000
5% preference shares @ Rs.100 each Rs.50000
Profits for the last 3 years are
51600, 52000, 51650
20% of profits to be transferred to general reserves
Normal rate of return expected is 10%
Calculate value of shares on the basis of net asset method and yield method.

2. The paid up capital of company consisted of 1000 15% preference shares of Rs.100 each Rs.100000
20000 equity shares at the rate of Rs.10 each Rs.200000
Average annual profits for 3 years after provision for depreciation and tax was Rs.75000
It is considered necessary to transfer Rs.10000 to general reserve before declaring dividends. Normal
Rate of Return is 10%. Calculate the market value per share
3. Following information is available
450 6% preference shares at the rate of Rs.100 each Rs.45000
4500 equity shares at the rate of Rs.10 each Rs.45000
External liabilities Rs.7500
Reserves and surpluses Rs.3500
Average expected profits after tax Rs.8500
Normal profits by same type of business is 9%
10% profits to be transferred to reserves
There was some fictitious assets worth Rs.350. calculate the value of shares by Net asset method and
yield method

4. The balance sheet of a limited company is given below

Liabilities Amount Assets Amount
7500 Equity shares of Land & buildings 41250
Rs.10 each 75000 Plant and machinery 48750
General reserve 15000 (Cost Less Depreciation)
Taxation reserve 22500 Trade marks 7500
Workmens savings A/c 11250 Stock 18000
Profit & Loss A/c 12000 Debtors 33000
creditors 36750 Cash at bank 19500
Preliminary expenses 4500

172500 172500
The plant & machinery is worth Rs.45000 and land & buildings has been valued at Rs.90000, Rs.3000 of
the debtors are bad
The profits of the company are
2002 2003 2004
30000 33750 39750
It is the companys practice to transfer 25% of profits to reserves. Find out the value of share on Net
asset basis, Yield basis, Fair value basis. Similar companies give a yield of 10% on market value of these
shares goodwill may be taken at Rs.60000

5. Following is the information given for a company

Share capital 10000 equity shares at the rate of Rs.10 each fully paid Rs.100000
1000 equity shares at Rs.10 each Rs.7.50 per share paid Rs.75000
10000 equity shares at the rate of Rs.10 each Rs.5 paid Rs.50000
General reserve Rs.50000
 External liabilities Rs.125000
Fixed assets Rs.180000
Current assets Rs.220000
Normal average profits less tax is estimated at Rs.30000 and the estimated rate of capitalization is 10%
calculate the value of each type of share under asset backing method, yield method and fair value
method

6. Balance sheet of a limited company

Liabilities Amount Assets Assets
40000 shares of Rs.100 Goodwill 100000
each 400000 Fixed assets 450000
Reserve fund 100000 Current assets 190000
P/L A/c 35000 Preliminary expenses 25000
9% debentures 100000
Current liabilities 130000
765000 765000
For the purpose of valuation of shares fixed assets are valued at 500000 and goodwill at Rs.150000.
There is a necessity of reserve for bad debts at 10% on debtors of Rs.75000. It is found that stock was
overvalued by Rs.9000. both these figures of stock & debtors are included in current assets. The net
profits for 3 years are- 69000, 71800, 90200
Out of these profits 20% was placed at reserves, the proportion being considered reasonable in the
industry in which the company is engaged on a return of 10%. Calculate the value of each share on the
basis of asset method, market value method and fair value method.
7. The following is the summarized balance sheet of X Ltd. Company as on 30 September 2004
Liabilities Amount Assets Assets
30000 equity shares at Freehold property 120000
the rate of Rs.10 each 300000 Plant & machinery 50000
General reserve 120000 Stock 310000
Capital reserve 40000 Debtors 203000
P/L A/c 120000 Bank 117000
Creditors 93700 cash 1700
Income tax payable 11500
Proposed dividends 34500
Provision for tax 82000
801700 801700
1. Net profits of last 3 years are
2002 2003 2004
138000 183000 197000
2. Freehold property was valued at Rs.160000
3. Average yield in this type of business is 15%, Assume that 50% tax and 20% of profits to be
transferred to reserves
Find out the value of equity shares on net asset basis, yield basis and fair value basis

8. From the following particulars calculate the yield value of shares of a company whose balance sheet is
given below
Liabilities Amount Assets Assets
8000 equity shares of Land & Buildings 500000
Rs.100 each 800000 Plant & machinery 600000
4000 9% preference Patents 200000
shares of Rs.100 each 400000 Debtors 300000
6% debentures 200000 Work in progress & stock 500000
Reserves 400000 Cash at bank 100000
creditors 400000
 2200000 2200000
Land & building to be valued at 900000. The company earnings are given below
Years Profits before tax Tax
1994 300000 80000
1995 400000 160000
1996 100000 40000(strike)
1997 500000 230000
1998 550000 300000
The company paid managerial remuneration of Rs.60000 p.a. but it becomes Rs.100000 in future. The
company proposes to build plant rehabilitation reserve of 15%. The equity shares with an average
dividend of 8%. Assumed tax rate at 50%
9. Given below is the balance sheet of a company
Liabilities Amount Assets Assets
1000 8% preference Buildings 1550000
share at Rs.100 each 100000 Less Dep. 250000 130000
2000 equity shares at Machinery 160000
Rs.100 each 200000 Less Dep. 40000 120000
General reserve 110000 Furniture 25000
P/L A/c 40000 Less Dep. 5000 20000
Creditors 100000 Investment in 6% Govt.
securities (face value
100000) 90000
Stock 100000
Debtors 65000
Less Bad debts 5000 60000
Cash and bank balance 20000
Preliminary expenses 10000
550000 550000
Following are the information given
1. Present value of buildings is 180000 and machinery is 80000
2. Company doing similar business have earning capacity of 10% on market value of shares
3. Average profits after 50% tax for the last 3 years is 48000
4. The company is holding 6% govt. securities on which interest is liable to tax
5. Goodwill of the company is taken at 5 Years purchase of super profits
6. It is considered to transfer Rs.10000 to general reserve before declaring dividends
Calculate fair value of shares of the company

10. Following is the balance sheet of a company as on 31.3.200

Liabilities Amount Assets Assets
30000 equity shares of Buildings 200000
Rs.10 each fully paid 300000 Plant & machinery 400000
40000 equity shares of Debtors 210000
Rs.10 each, Rs.5 paid up 200000 Stock 250000
9% preference shares of Cash at bank 40000
Rs.100 each 100000
Reserves 300000
Creditors 200000
1100000 1100000
Profits & dividends for several years are
Years Profits before tax Equity dividend
2001-2002 320000 18%
2000-2001 250000 15%
1999-2000 220000 12%
Land & buildings are valued at 400000
Managerial remuneration is likely to go up by 20000 p.a
Income tax may be provided at 50%
Equity shares of companies in the same industry with a dividend rate of 10% are quoted at par
Ignore transfer to reserves and calculate the value of each share by intrinsic method, yield method and
fair value method

Earning capacity method (with all other methods)

1. On 31.12.04 balance sheet of a company is given below
Liabilities Amount Assets Assets
Issues capital at Rs.10 Fixed assets 500000
each 400000 Current assets 200000
Reserves 90000 goodwill 40000
P/L A/c 20000
5% debentures 100000
Current liabilities 130000
740000 740000
On the above date the fixed assets were independently valued at 350000 and goodwill at 50000. The
net profits for 3 years after tax is given below
2003 2004 2005
52000 51650 51600
Out of the profits 20% to be placed to reserves, the proportion being considered in the industry in
which it is engaged where a fair investment return may be taken at 10%. Compute the value of
company shares under net assets method, yield method, fair value method, and earning capacity
method.
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