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 value is simply the net assets, or equity, divided by number of shares. VALUATION OF SHARE = NET ASSET+ GOODWILL NUMBER OF SHARES

Different name of asset backing method
‡ ‡ ‡ ‡ ‡ Net asset valuation method Capital valuation method Valuation of equity method Intrinsic value method Break-up value method

IMPORTANT POINTS TAKEN INTO CONSIDERATION WHILE ESTIMATING THE VALUE OF NET ASSET
Fixed asset should be revalued at their net realizable value. Inventory should be taken at current market prices. Investments should be taken at current market prices. Other current assets like Bills Payable or Sundry Debtors should be valued at their expected net realizable value. ‡ All fictitious assets appearing in the Balance are to be eliminated. ‡ Goodwill may be valued on the basis of super profits. ‡ All unrecorded assets and liabilities are to be taken into consideration ‡ ‡ ‡ ‡ From the aggregate value of the assets , all external liabilities are to be deducted to arrive at the net assets figure. External liabilities include Sundry Creditors, Bills Payable, Loans , Debentures, etc.

The Balance Sheet as at 31st March, 2007 showed the following position: LIABILITIES
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 before providing for taxation were as follows: Rs 4,10,000; Rs 6,40,000; Rs 7,00,000; 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 be considered at 50%. 5. Goodwill should be valued at 5 years purchase of super profits. 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: Bank 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 8,50,000+ Rs 9,00,000)/5 Add back managerial remuneration RS 7,00,000 60,000 7,60,000 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 Capital 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. Therefore, 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 1,04,500 32,77,500 Number of Shares Value per share(Rs 32,77,500/20,000) 20,000 163.875

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