Valuation of shares means such valuation of shares
at which their purchase, sale, transfer or tax is assessed or on the basis of which the shareholder or anyone else has a true knowledge of the position of the share capital is received. This value of the shares may be less or more than its face value.
In the words of William Pickles, “The problem of valuation of shares is a difficult problem from an accounting point of view. Although its principles are not difficult, but sufficient knowledge of tantric subjects is required for their use.
Thus, valuation of shares refers to the calculation of the value of each share of a company at which their purchase, sale, transfer or wealth tax is determined.
With the rate of dividend remaining constant, their value also generally remains constant, so equity shares are generally valued.
Before valuing the shares it is necessary to know whether the valuation of preference shares or equity shares is of public company or private company and what is the purpose of valuation of shares?
Necessity of Valuation of Shares
The problem of valuation of shares, though important, is at the same time difficult. in the following cases Valuation of shares is necessary
(1) when the shareholder dies and death tax is to be assessed.
(2) When the shareholder wants to find the actual value of the shares.
(3) When valuation of shares is to be made for paying wealth tax.
(4) When the question of fusion or merger of two different divisions arises.
(5) When shares are to be purchased to control a company.
Types of value of shares
The value of the shares of the company can be stated as follows:
(1) Par Value or Face Value The monetary value of each share mentioned in the company’s councilor limit capital sentence is called par value. face value means that value of rule which is given along with the share capital displayed in the balance sheet of the company. Whether the shares are issued at interest issued or issued on deduction.
(2) Market Price The market value of shares refers to the price which is determined by the balance of the forces of demand and supply of shares in the stock market. This price may be available in respect of only those shares which are quoted in the inventory market.
(3) Cost Price or Purchase Price But the shares are bought, that is called the cost price or cost price of the shares. Thus, the cost price or purchase price includes the cost of purchase of shares and the expenses incurred on the purchase, such as brokerage, commission, transfer fee etc.
(4) Book Value The sum of the accumulated excess paid up share capital of the company is called book capital. The book value per share is determined by dividing the book capital by the number of shares issued. The above known per share price is called book value. Its formula is as follows-
Per Share Book Value = Paid up Capital + Reserves + Surplus
Number of Shares Issued
(5) Intrinsic Value is called the net worth of the assets remaining after deducting the company’s external liabilities from the real assets receivable at a given date. The value found by dividing the number of issued shares by the known net value of the assets is called the intrinsic value of the shares. The formula to find it is as follows-
Receivable Value of Company’s Real Assets – External Liability Assets = Net Value of Assets
Intrinsic value per share = number of shares
net worth of
(6) Fair Value The intrinsic value of shares and the market average is called fair value. It can be found by the following formula
Fair Value = Intrinsic Value of Shares Market Value
(7) Capitalized Value This value depends on the earning capacity of the shares. To find the capitalized value of the earning capacity of the company on the basis of normal rate of return on capital employed The value per share is then determined by dividing the number of shares in the known capitalized value.
Factors affecting valuation of shares or valuation general principles of
The following are the major factors to be taken into consideration while valuing the shares of a company.
(a) Average profit earned by the company in previous years, (b) Minimum and maximum profit earned in previous years Level of profit, (c) Average rate of income earned on capital employed (after tax), (d) Tax and preference The amount of profit remaining after deducting dividends and the rate of profit, (e) which has decreased in the past and will decrease in the future
Events that have had an effect on profits or will affect future profits. 2. Rate of Return of Other Companies of Similar Nature – The prevailing normal rate of income of other companies of similar nature also affects the value of the company’s shares.
3. Dividend Policy of the Company The rate of dividend declared by the company is of utmost importance from the point of view of small investors. This rate has a great impact on the valuation of the shares. Large investors give more importance to total profit than dividend rate. Hence, the total quantum of profit from the point of view of large investors affects the valuation of the shares.