Introduction to Valuation of Share:
The process to know the value of the shares of a company is called as Valuation of Shares. The value shares of a company totally depend on their demand in the market and its supply. Valuation of shares for a particular entity is done by the techniques that have quantitative approach. One can always find the value of shares of the listed companies easily, as they are traded publically. But for companies like private companies the Valuation of Shares become much more important as their shares are neither listed nor traded on public platform. The valuation of share is done considering the following value of any share of the company:
- Face Value- The capital share of the company is its face value which has to be mentioned in the share certificate.
- Cost Value- It includes the cost at which the shares have been purchased inclusive of expenses of purchase like commission and brokerage of at any time.
- Fair Value- It is calculated by adding the share value by NAV method and share value by the yield method divided by the total number of shares in the company.
- Capitalized Value- The value profit capitalized divided by the total number of shares.
- Book Value- It is the value of share capital of the company in addition with the profits accumulated and reserves, while deducing the losses accumulated in a financial year.
- Market Value- The price at which the shares have been sold or purchased. This can be less or more than the face value of share of the company.
- Intrinsic Value- It includes the net assets of the company by adding the current assets, investments and fixed assets, while deducting the capital in preference shares and debentures with outside liabilities.
Instances when companies must have Valuation of Share:
Any company requires its shares to have valuation in the following circumstances-
- Shares can act as security or collateral when the company wants a loan based on them.
- Valuation of Shares is really important at time of merging with another company.
- It is important for assessment of tax.
- It is important at time of acquisition of property, shares etc. by the company.
- When the company is converting the preference shares or debentures to equity shares.
- During the implementation of Employee Stock Ownership Plan (ESOP), the Valuation of Shares is necessary.
- At time of reconstruction of the business.
- When the business is selling and the value of the whole entity is to be known.
- Where there is litigation and legally it is mandatory to know the exact value of the shares of the company.
- When two or more companies are amalgamating into one.
Methods of calculating Valuation of Shares:
Each and every company must calculate the Valuation of Shares. For this various methods and approaches are being provided at time of availing valuation service to consider the share value-
- Market based method- This approach is based on the prices of share or stock sales of the company.
- Dividend yield method- Expected rate of dividend is calculated in this method.
- Earning capacity method or Earning yield method- Expected rate of earning and value per share is to be calculated.
- Asset based method- This approach is based on all the assets and liabilities of the company.
- Net asset value method- Value per is to be calculated by dividing the net asset preference share capital and number of equity share.
- Income based method- In case of calculating the values of smaller number of shares this method comes handy.
- Average face value method- It is calculated by obtaining the profit of the company, data of capitalized value and share value.