How to Value Shares & Business?

Introduction
The valuation of shares and business is resorted when the merger and acquisitions proposals are under consideration. The readily available mode of valuation is to take the stock exchange quoted price. Such market price depends on the expectations of the investors, growth prospects of the company, present and future competition, the risk class of industry, yield on comparable securities, market sentiments, fundamentals of the company etc. But sometime, the share price may be quoted lesser due to asymmetric information.
2

Value of Share & Company

Asset Based Valuation (intrinsic value method)

Net assets available to equity shareholders Number of Equity shares

Valuation Relative to Industry Averages

The relative valuation apply a relation of specific financial or operational characteristic from a similar company or industry to the company being valued The following valuation models are generally used basing on the industry averages or averages of a similar company in the same industry: (a) Dividend Yield Method (b) Earnings Yield Method (c) Return on Capital Employed Method (d) Price/Earning Method
7

Dividend Yield Method

Value per Share =
Company's dividend per share Industry's average dividend per share or Company's rate of dividend per share X Nominal value of company's share Industry's normal rate of dividend Value of Business = Value per equity share

X Total number of equity shares

Ashoka Builders Ltd. has an issued and paid up capital of 5,00,000 shares of Rs. 10 each. The company declared a dividend of Rs. 12.50 lacs during the last five years and expects to maintain the same level of dividends in future. The control and ownership of the company is lying in the few hands of directors and their family members. The average dividend yield for listed companies in the same line of business is 18% Calculate the value 3,000 shares in the company.
9

ABC Ltd. has declared dividend during the past five years as follows: Year 2001 2002 2003 2004 2005 Rate of dividend (%) 12 14 18 21 24 The average rate of return prevailing in the same industry is 15%. Calculate the value per share of Rs. 10 of ABC Ltd. based on the dividend yield method.
10

Earnings Yield Method

Value of Business= Company's expected future maintainable profits Industry's normal earnings yield
Kavery Industries Ltd. is expected to generate future profits of Rs. 54,00,000. What is its value of business if investments of this type are expected to give an annual return of 18%.

11

12

13

Return on Capital Employed

Value of share= Rate of return X nominal value of share Market expected rate of return

14

15

Price Earning Method

16