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____ pnt - Vi a, VALUATION OF apt, es, , —, , , , , , value is called as par value OF face, , CONCEPT AND MEANING :- 5. Such one, The value of every share is printed in front of — joint stock company re 'S Siven in the, value of shares. The face value is assign by the prom jso get market value on stock exchange m,, memorandum of association. Exceptthe face value, ithas @ of a share 1S determined by the demand, which may be differ from face value. The market value d their fear, Suess, InVestmen,, d requires a Proper valuation,, , : + ag of investors an, supply. Such a value is affected by the action and oe nevalae ofsharesan, policy etc. Hence, the market price does not reflect the f such a compariy are not freely, , . ee the shares ©, of shares. Specially, in the case of private limited company ones absolutely necessary, purchased and sold to the public. In that case, t, , ation beco! 4 :, ‘ ed an be valued either by taking the, The value of shares can be determine, , d in different a pee is governed by the reasons fo,, earning of a company or net assets that com| prise the company., investment., , OBJECTIVE / PURPOSES :The purpose of valuation of share are:, (i) To Assets under the Wealth Tax or Gift Tax Acts. :, @ To Purchase a block of shares which may or may not given the holder there of a controlling, interest in the company. : gee, (3) To Purchase shares by employee of the company where the retention of such shares is limited to, the period of their employment., (4) To Formulate schemes of amalgamation, absorpti, 6) To Acquire interest of dissenting shareholders und, (6) To Compensate shareholders, on the acquisition of their,, , ion , etc., erascheme of reconstruction., by the Government under scheme of, , nationalization., (7) To Convert shares, say, preference into equity shares., (8) To Advancea loan on the security of shares., ling block of \, , (9) To Resolvea deadlock in the management of acompany on the basis of the control, shares given to either of the parties for example in case of Realisation Industries., , NEEDS :The following are the circumstances where need for the valuation of shares arises:, , (@) Where companies amalgamate or are similarly reconstructed, i i, Bee ly tro mcilichs of hb Seipary being auny bene arriveatthe, (2) Where shares are hold jointly by the partners i ioe d, becomes necessary to value of shares. partners in a company and partnership firm dissolved :, (3) Where a portion of the shares is to be given by . al, member as the member cannot sell it in ie wn ae amber of proprietary company to anothet, price of these shares by an auditor. et, it becomes necessary to certify the fait, , (4) Whenaloan advanced on the security of shares, it as, pecomes necessary to know the value, , , , | (5) When shares are given in a company as gift j, | tax, to place a value on the shares. as gift itmay be necessary for the purpose of, , 5 © When preference shares or debentures are converted ane, le the, debentures or preference shares which are to be con

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{| (7) When equity shareholders are to ele, (| government undera scheme . ee ne, , th <i 5, ofnationalization neck acquisition of their shares by the, , isnecess:, , ary to value the equity shares., FACTORS AFFECTING THE VALUE OF SHARES :The value ofa share is greatly affected by the economic, political and social factors such as:, (i) The nature of the company’s business, (2), , The economic conditions of the country, , 6) Other political and economic factors (e.g., possibility of nationalisation, excise duty on goods, produced etc.), , (4) The demand and supply of shares, (5) Proportion of liabilities and capital, | Rate of proposed dividend and past profit of the company, 1 ¢ ield of other related shares of the Stock Exchange etc., | METHOD OF VALUATION oF SHARES :qa Net Asset Method:- This is also known as Balance Sheet Method or Intrinsic Method or Break- |, , up Value Method or Valuation of Equity basis or Asset Backing Method. Here the emphasis is on, , the safety of investment as the investors always need safety for their investments. Under this, method, net assets of th, , ¢ company are divided by the number of shares to arrive at the net asset, , value of each share., , Points to be remembered while calculating net assets(a) The value of goodwill will be ascertained., , (b) Fixed assets of the company, disclosed or undisclosed in Balance Sheet, are taken at their, realisable values., , (c) Floating assets are to be taken at market value., (d) Rememberto exclude fictitious assets, such as Preliminary Expenses, Accumulated Losses etc., (e) Provision for depreciation, bad debts provision etc. must be considered. : ; all, (f) Find out the external liabilities of the company payable to outsiders including continge!, liabilities. ie aa, F culation of Net Assets = Assets — External Outside Li i F ,, - a at market value (excluding the assets) Under the head of ‘Misc. Expenditure & losses’), , Rs., , , , , , , , , , Assets, , Goodwill :, , Land & Buildings, , Plant & Machinery 5, Fixtures, Fittings & Furniture, Investments, , Trade Marks, , Stock, Debtors, Bills Receivable -_, Cash in hand and at b, , , , , , , , , , , , , , , , cle eEREREEEE |F, , Advance, , , , , , ernal or Outsta ig, Less : Ext ndin: Liabilities, , Debentures, Creditors, , Bills Payable

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oe ais ee 2 ae, xpenses, , Outstanding B», Loans, , Provision, Provident Fund, Workmen’s Compensation Reserve, Workmen’s Sav, Other liabilities, , for Taxation, , ings A/e, to be paid, , Net Assets, , Iculation of Net Assets, , , , , , , , , , , , , , , (al a ee, Available to Equity Shares Holder ‘, , , , Step 2 : Cal, Net Assets, , Less : Preference Share Capital, Dividend payable to preference Shareholders, , reholders, , , , , , Net Assets Available to Equity Sha, , , , , , , , , , , , , , , , , OR, (Alternative Method ) :, , , , , , , , , , , Paid-up Equity Shate ita, , Add : i) Items under ‘Reserve me 7, Such as General Reserve , Reserve Fund., Capital Reserve, Dividend Equalisation i, Reserve, Profit & Loss A/c etc. . :, , ii) Profit on Revalution of Assets, , Less : i) Items under Miscellaneous, Expenditure & losses’ such as Discount o, -Debenture ‘, ad miahaie, piomecron ome ot, Unde iting commission , preliminary, y ExpensesG, Profit & Loss A/c (Dr.) etc, Loss on Revaluation of Assets :

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aL ee nee, , , , , , , , (a) Valuation of: Shares Based :, , (b), , , , , , , , , , , , , , , , , , , , , , , , , number of shares this manent? of Dividend, dividend (creamagaeren As suitable because the smat, , Value per share = Expected Rate of Dividend, Normal Rate of Return * Paid up value per share, OR, Value per share = Dividend Per Share, Normal Rate of Return eu, , Non, - cote os etm This is that rate of earning which is generally expected by the, to industry, ia particular type of Industry, This rate may differ from industry, , Expected Rate of Divi :, itis ieee. find ore t+ To compute the value ofthe share on the basis of rate of dividend,, , the rat ivi * c 5, generally the largest rate oh co idend on shares, from the point of view of small investors, , jer aa dividends, weighted averages of rates should be taken if in a question, the rate of, shaseiot dae it can be calculated on the basis of distributed profits available for equity, ‘ers dividend. The distributable profits available for equity shareholder's dividend, , should be taken after pa in i, a) 'yment in income tax, transfer to reserve and payment of preference, dividend. For expected rate of dividend , the formula will be :- — =, , ao Distributed Profits To Equity Shares, Expected Rate of Dividend = — ued Frolits To Equity Shares _, on Paid-up Equity Share Capital a, , OR, , Dividend Per Share in Rs., =) Eee ee 00, Expected Rate of Return Paidanp Walser Sh Xt, , Valuation of Share Based on Actual Rate of Earning :- This method is an improvement over, the yield value method. Generally, some companies distribute only a part of their profits in the, “orm of dividend to the shareholders and balance of profits is transferred to its reserve oo these reserve funds (accumulated Profits) are likely tobe distributed sooner or — ata, bonus shares to the shareholders. Therefore it would be more appropriate to value, based on the actual earning rather than the dividend declared by the company., , i i i ling interest, i estors who are intended to acquire the contro!, Panne mae valuation of their holdings (shares) should be based onthe |}, , sae i any, ‘ fF, one — eae for calculating the value of shares on the basis of actual rate 0}, actual ¢: :, , ing i der :- ;, earning Is as un Actual Rate of Earning __y paid-up Value of a Share, , Value per share = — Normal Rate of Return, , g in not given. Then,, , * Jf Rate of earnin ‘Actual Profit Earned

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ee al, , ie - Capital Emple, Total capital Employed = C4P™ |, , , , erm loans, nyed + Long term, , vr avaiable fr guise SAERSIEES. 309, Rate of Earning ~ ——paid-up Equity Share Cap!, caption of Dee at Ba li, i rate Me aividend is computed as oF Nantainadle profit. gal, wert shareholders or avera:, , al, ge future Mt will be calculated as ¢, sis of normal rate of capitalization oF ee jae : ral ize the profits —, the basis of norm following formula is @ joptet ma, ——— Profit Available For Distribution, , (c) Valuation of shares Based 01, , Capitalised Value of Profit= “Normal Rate of Capitalisation or Retum, , 3 v i beused—, - i he following methods can, To determine the value of the share, any oft : en j, , itali fits is divi : c, - poe i pa type of shares having same paid up value of shares), Capitalised Value of Profits, , Value of Share = No. of Equity Sale, , itali is divi i ity share capital. The re:, , Th talized value of profit is divided by the paid up equity p, , 2 dabasah pee ae paid a share and this will be multiplied by the paid up value. of:, ascertain the market value of the shares under capitalization of profit method., method is adopted in that condition where the different paid up amount of the va, , share i, meEiven) ox Capitals Value of Profits, alue of Share “Paid-up Equity Share Capital, , (3) _ Average Basic or Fair method :- Some investors care for the safety of their inv, other are interested in the earning on their investment. And if some investors are inter, both income as well as safety. Such a value of share should be calculated which may, ee For fae purpose the fair value of the share is calculated, which is b, , | intrinsic value and market or yield value of the share. It is considered the most ay, method. Forthis method, the following formula used- ;, , , , , , , , , , x paid-up value ofa s! fi, , Fair Value of the Share = __ltttinsic Value of Share + Market or Yield Value, 2 he, , SOLVED QUESTIONS, , | } nunhenas Valuation of only one type of equity, , On31*March 2019 the balance sheet of XYZ} hes ., \ ‘Limited company fisclose 7