ADVANCED ACCOUNTING PROJECT ON GROUP - 18

PRESENTED BY:PARTH PATEL 52 PRASHIN PATEL 53 PRIYANKA PATEL - 54

INTRODUCTION
MEANING Normally the value of shares is ascertained from the market price quoted on the stock exchange. Sometimes, however the valuation has to be done by independent valuer. Shares of limited company are required to be valued on many occasions.

Sale or purchase of shares of private limited company whose shares are not quoted on the stock exchange. Conversion of one class of shares in to another e.g. Conversion of preference shares into equity shares. Ascertaining value of shares offered as security against loan.

METHODS OF VALUATION

There are basically two methods of valuation of shares 1. Net Assets Backing method 2. Yield method
Valuation based on rate of dividend Valuation based on rate of earning.

NET ASSETS BACKING METHOD

This method is also known as Intrinsic Value method, Breakup value method. Under this method Net assets of the company including Goodwill and Non-trading assets are divided by number of equity shares to arrive at the assets backing for each share. FORMULA: Net asset value of Equity shares= Net asset available for Equity shareholders Number of Equity shares

The valuation of shares under this method involves Computation of Expected rate of Dividends & computation of normal rate of dividends:
Expected Rate of Dividends Normal rate of Dividends

1.

2.

Valuation based on EXPECTED RATE OF DIVIDEND

This method is more suitable for valuation of small block of shares. The value of shares under this category of yield method is computed by following FORMULA: Expected rate of Dividends = Profit available for Equity dividends X 100 Paid-up Equity Capital Value of share= Expected Rate of Dividends X Paid up value of equity shares Normal Rate of dividends

Valuation based on RATE OF EARNING:

This method of valuation of shares is suitable for valuing large block of companys shares because they are more interested in companys earning rather than what the company distributes in the form of dividends.

FORMULA:
Rate of earnings = PAT+ Interest X100 Gross Capital Employed Value of share = Rate of earning X Paid up value of share. Normal rate of Earning

FAIR VALUE METHOD

The fair value of share is the average of the value obtained by the net asset method and yield method. This is of course, no valuation but a compromise formula for bringing the parties to an agreement. However it is recognize in Government circles for valuing shares of investment companies for wealth tax purpose.

FORMULA: Value of share=

values as per net asset method 2

+ value as per yield method

EXAMPLE
Liabilities

31.12.2011 the Balance sheet of Apple limited company reveals the following position:
Amt (Rs) Assets 2,00,000 Fixed Assets 45,000 Current Assets 10,000 Goodwill 50,000 65,000

Amt(Rs) 2,25,000 1,00,000 20,000

Equity shares of Rs.10 each Reserves Profit & Loss A/c 5% Debentures Current Liabilities

Total

3,70,000 Total

3,70,000

On December 31st, the fixed assets were independently valued at Rs.1,75,000 and the Goodwill at Rs.25,000. The net Profits for the 3 years were 2009: Rs.25,800, 2010:Rs.26,000, 2011:Rs.25,825 of which 20% was placed under reserve, this proportion being considered reasonable in the industry in which the company is engaged and where a Fair investment return may be taken at 10%. Compute the value of companys shares by (a) the Net Assets method (b) the Yield value method based on Dividend and Earnings.

SOLUTION
Valuation of shares as per net assets backing method Calc. of net assets

fixed assets Current assets Trading assets (less): external liabilities Creditors 5% debentures Capital employed (add): goodwill Net assets available For equity share holders

175000 100000 Rs. 275000 (65000) (50000) Rs. 160000 25000 Rs.185000

Net asset value of Equity shares= Net asset available for Equity shareholders Number of Equity shares

= 185000 20000

= Rs. 9.25

Yield method based on rate of dividend

Avg. profit = Total profit of 3 years 3 = 25800+26000+25825 3 = 77625 = Rs. 25875 3 Profit available to equity shareholders Avg. profit (Less): transfer to reserve (20% of 25875) Profit available to equity share holders 20700

25875 5175 Rs.

Expected rate of Dividends = Profit available for Equity dividends Paid-up Equity Capital = 20700 x 100 = 10.35% 200000

X 100

Value of share= Expected Rate of Dividends X Paid up value of equity shares Normal Rate of dividends = 10.35 X 10 =Rs. 10.35 10

Valuation of share based on earning method

175000 100000 25000 65000 Rs. 235000

Gross capital employed: Fixed assets + current assets + goodwill - current liabilities gross capital employed

Rate of earnings = PAT+ Interest x 100 Gross Capital Employed = 25875 + 2500 235000 = 12.07% x 100

Value of share= Expected Rate of Dividends X Paid up value of equity shares Normal Rate of dividends

= 12.07 10

X 10

= Rs. 12.07

Fair value method

values as per net asset method 2 = 9.25 + 12.07 2 = 21.32 = Rs.10.66 2 + value as per yield method

Value of share =

CONCLUSION

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