Share Valuation

Methods of Shares Valuation

The most common methods of valuing
shares are:
a)
b)
c)
d)
e)
f)

Earnings (P/E ratio)

Accounting rate of return
Net Assets
Dividend yield
Super profits
Discounted Cash Flow based valuation

 Issues in share valuation

The method(s) of valuation chosen will
depend on the following issues:
1. Is the company going concern? If not,
only break up value is required future
earnings are irrelevant
2. Perspective of valuation ie. Buyers or
Sellers
3. Is the company listed? Unlisted
companies are valued at a discount
against similar listed companies

1) The P/E Ratio (earnings) method of

valuation:
Since P/E Ratio = Market Value per share /EPS
or
Earning yields = EPS / Market value per share
Market Value per share = P/E ratio x EPS

Problems with using price earnings

multiples:

The calculation of the future earning figure

is arbitrary
Selecting a suitable P/E ratio is difficult
Any discounting of the selected P/E ratio
of a listed company is arbitrary

2) The Accounting rate of return (ARR) method of

share valuation:
Value of the company = Estimated future earnings /
Required rate of return on capital employed
Problems associated with ARR:

a) It is difficult to calculate an accurate figure for post

acquisition profit
b) The method does not take account of future
growth in profits

3) The net assets method of share valuation:

Value of share = net tangible assets/ no of equity
shares
Intangible assets should be excluded unless it has
a market value for example Patents and Copy
rights which can be sold.

4) The dividend yield method of share valuation:

The simplest dividend capitalisation technique is
based on the assumption that the level of dividends
in future will be constant.
Value per share = Dividend per share / Expected
dividend yield
If expected future dividend is assumed to grow
then:
Dividend growth model for share valuation should
be used ie.:
MV = do (1+g)/ (r-g)
Where:
MV
= Market value of share
Do
= Current dividend
g
= expected annual growth in dividend
do(1+g) = expected dividend next year
r
= the required rate of return

5) The Super profits method of share

valuation:
This method starts by applying a fair return to
the net tangible assets and comparing the
result with actual profits, any excess of profits
(called super profits) is used to calculate
goodwill.
The goodwill is normally taken as a fixed
number of years super profits
Value of company = goodwill (arrived as
above) + net tangible assets

6) The discounted future earnings of

share valuation:
It is the sum of Estimated future
earnings discounted by appropriate
rate of return.
Problems associated with this method
are:
a) Difficulty of predicting future cash
flows
b) Problem of choosing an appropriate
discount rate.