Valuation of shares
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1. There are three main methods for valuing shares: the Earning Capitalization Method (ECM), Dividend Capitalization Method, and Fair Value Method. 2. The Intrinsic Value or Net Asset Value of shares is also calculated, which is the net worth per share based on assets, liabilities, and number of shares. 3. The Fair Value Method values shares for controlling interest by taking the intrinsic value and adding the value from the ECM. This comprehensive approach incorporates both asset-based and earnings-based valuation.
Valuation of shares
- 1. Valuation Of Shares Earning Capitalization Method (ECM) Dividend Capitalization Method Fair Value Method Fair Value = Intrinsic Value + ECM 2
- 2. Calculation Of Value on Intrinsic Value Basis Also Known as : Intrinsic Value Net Asset Value Break up Value Net Worth Per Share Book Value Per Share
- 3. Valuation of Intrinsic Value : Sundry Assets ---------- Less: Sundry Liability ---------- Add: Goodwill ( Revalued) ---------- Add: Non Trade Investment ---------- Less: Preference Share Capital and Dividend in Arrear ---------- Add: Notional Calls ---------- Net Asset For ESH ====== Divided By No. of Shares ---------- Intrinsic Value ======
- 4. Note: Goodwill will always be calculated for the purpose of Intrinsic Value Note: Sundry Asset and Liability are after : Revaluation Rectification New Policy etc. Note: Always Calculate Intrinsic Value on Ex Dividend Basis. Intrinsic Value = Int. Value + Div Per Cum Dividend Ex Dividend Share
- 5. Earning Yield Method / Earning Capitalization Method / Yield Method = Earning Rate × Paid Up Share Capital Per Share NRR Future Marketable - Non Trade Inv. Profit Income Net of tax Earning Rate = x 100 Share Capital Use : Where large no. of shares is to be valued ( Big Lots)
- 6. 2. Dividend Capitalization Method Dividend Rate x Paid up share cap per share Normal Rate of return Dividend Rate is rate of Dividend Company is expected to pay. Normal Dividend Rate is NRR. This method is applied for Small Lot of shares .
- 7. 3. Fair Value Method Fair Value = Intrinsic Value + ECM 2 This method is to be used for valuation of shares for controlling Interest.
- 8. How to Calculate Normal Rate of Return NRR of Industry is taken as Base --------- Add: Risk Factor ½ % Assumed --------- ( Risk Premium for each risk) Ke of Companies NRR Risk Factors: Dividend Track Record Dividend Coverage Ratio Asset Backing Ratio Debt Equity / Capital Gearing Ratio
- 9. Equity Dividend Coverage Ratio = PAT – Preference Dividend with CDT Equity Dividend Preference Dividend Coverage Ratio = PAT Preference Dividend
- 10. Asset Backing Ratio = Intrinsic Value Per Share Paid up value per Share Capital Gearing Ration = Debt + Preference Share Holder Equity – Losses – Preference Share Holder Debt Equity = Debt Equity
- 11. 4. Valuation of Business It can be on the basis of: Shares Cash Flows Value as per Share = Number of × Value of Shares Shares Value per share can be : MP , Intrinsic Value , Fair Value , ECM , DCM Value of Business on Cash Flow Basis = Cash flow of Business × Discount Factor