Valuation Of Shares
Earning Capitalization
Method (ECM)
Dividend Capitalization
Method
Fair Value
Method
Fair Value = Intrinsic Value + ECM
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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
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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
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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 =
Cum Dividend
Int. Value
+
Ex Dividend
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Div Per
Share
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1.
Earning Yield Method /
Earning Capitalization Method / Yield Method
= Earning Rate
NRR
× Paid Up Share Capital Per Share
Future Marketable Profit
Non Trade Inv.
Income Net of tax
Earning Rate =
x 100
Share Capital
Use : Where large no. of shares
is to be valued ( Big Lots)
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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.
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3. Fair Value Method
Fair Value = Intrinsic Value + ECM
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This method is to be used for valuation of
shares for controlling Interest.
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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
Risk Factors:
1. Dividend Track Record
2. Dividend Coverage Ratio
3. Asset Backing Ratio
4. Debt Equity / Capitalwww.SafeeCollege.com
Gearing Ratio
-----------------
NRR
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Equity Dividend Coverage Ratio =
PAT – Preference Dividend with CDT
Equity Dividend
Preference Dividend Coverage Ratio =
PAT
Preference Dividend
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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
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4. Valuation of Business
It can be on the basis of:
1. Shares
2. Cash Flows
1.
Value as per Share =
Number of
Shares
×
Value of
Shares
Value per share can be : MP , Intrinsic Value , Fair Value , ECM , DCM
2.
Value of Business on Cash Flow Basis =
Cash flow of Business
×
Discount Factor
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