METHOD OF VALUATION OF SHARE

ASSETS BACKING METHOD

Presented by : Amarjit kumar Roll no: 04
ASSETS BACKING METHOD
Asset valuation method or Intrinsic value method Under this method the share val
ue is simply the net assets, or equity, divided by number of shares. VALUATION O
F SHARE = NET ASSET+ GOODWILL NUMBER OF SHARES
Different name of asset backing method
Net asset valuation method Capital valuation method Valuation of equity method I
ntrinsic value method Break-up value method
IMPORTANT POINTS TAKEN INTO CONSIDERATION WHILE ESTIMATING THE VALUE OF NET ASSE
T
Fixed asset should be revalued at their net realizable value. Inventory should b
e taken at current market prices. Investments should be taken at current market
prices. Other current assets like Bills Payable or Sundry Debtors should be valu
ed at their expected net realizable value. All fictitious assets appearing in th
e Balance are to be eliminated. Goodwill may be valued on the basis of super pro
fits. All unrecorded assets and liabilities are to be taken into consideration F
rom the aggregate value of the assets , all external liabilities are to be deduc
ted to arrive at the net assets figure. External liabilities include Sundry Cred
itors, Bills Payable, Loans , Debentures, etc.
The Balance Sheet as at 31st March, 2007 showed the following position: LIABILIT
IES
Share Capital: 20,000 equity shares of Rs 100 each General Reserve Profit & Loss
Account Current Liabilities: Bank Overdraft Creditors Provision for Taxation
RS
20,00,000 6,00,000 3,50,000 3,00,000 4,00,000 5,00,000
ASSETS
Debtors Stock-in-hand Plant Factory Premises
RS
5,00,000 15,00,000 10,00,000 11,50,000
41,50,000
41,50,000
ADDITIONAL INFORMATION: 1. Net Profits of the company for the last five years be
fore providing for taxation were as follows: Rs 4,10,000; Rs 6,40,000; Rs 7,00,0
00; Rs 8,50,000; Rs 9,00,000. 2. Managerial remuneration of Rs. 60,000 has been
charged for each year. 3. The market value of the assets were as follows: Stock-
Rs 15,50,000; Plant-Rs 10,40,000;Factory premises-Rs 12,83,000 4. Taxation may b
e considered at 50%. 5. Goodwill should be valued at 5 years purchase of super p
rofits. 6. Normal rate of return- 10% p.a. On the basis of the above information
, find out the intrinsic value of shares.
Calculation of Capital Employed
NET ASSETS BASIS
ASSETS Debtors Stock in hand Plant Factory Premises Less: Outside Liabilities: B
ank overdraft Creditors Provision for taxation
RS
5,00,000 15,50,000 10,40,000 12,83,000
RS
NET WORTH BASIS
Equity share capital General reserve Profit & loss a/c Add: Revaluation profit:
Stock Rs. (15,50,000-15,00,000) Plant Rs. (10,40,000-11,50,000) Factory Premises
(12,83,000-11,50,000)
RS
2000000 6,00,000 3,50,000
RS
29,50,000
43,73,000
50,000 40,000 1,33,000 2,23,000
3,00,000 4,00,000 5,00,000
12,00,000 31,73,000 31,73,000
Calculation of Super Profit
PARTICULARS Average maintainable trading profit (Rs 4,10,000+ Rs 7,00,000+Rs 8,5
0,000+ Rs 9,00,000)/5 Add back managerial remuneration RS 7,00,000 60,000 7,60,0
00 Less: Managerial remuneration (maximum 11% allowable under Companies Act,1956
) 83,600
Profit before Tax Less: Tax 50% Profit after Tax Less: Normal return- 10% on Cap
ital employed Super Profit
6,76,400 3,38,200 3,38,200 3,17,300 20,900
3. Valuation of Goodwill
Goodwill is to be valued on the basis of 5 years purchase of super profit. There
fore, the goodwill will be Rs.20,900 x 5= 1,04,500
4. Valuation of Shares under Intrinsic Value Method
PARTICULARS Net assets as in (1) above Goodwill as in (3) above RS 31,73,000 1,0
4,500 32,77,500 Number of Shares Value per share(Rs 32,77,500/20,000) 20,000 163
.875
THANK YOU