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Share and valuation



The value of a share is first stated in the Articles of Association of the Company. It is also stated in the Balance sheet of all companies. The value, stated in the Balance Sheet (or in the books of account and Articles of Association) is called book-value of a share. The value of a share (the price) at which it can be sold or purchased is market value which may be more or less than the book-value. The problems relating to valuation of shares may be discussed under the following broad heads:

(A) Valuation of Equity Shares; and (B) Valuation of Preference Shares. It is the process of recording financial transactions as well as reporting on the financial status of a business. Two reports (statements) are typically generated in accounting process. These are (i) Balance sheet, (ii) income statement. These five elements are (a) assets (b) liabilities (c) equities (capital) (d) incomes and gains and (e) expenses and losses. Hence, capital is an important component or element of financial statements. Capital of a company is represented through number of shares issued and the value of such issued shares. Hence, capital is an important component or element of financial statements. Capital of a company is represented through number of shares issued and the value of such issued shares. The value shown against such shares in the balance sheet is the face or nominal value not the real value. In this context we may refer to the basic accounting equation:

Assets = Capital + Liabilities Or Capital = Assets Liabilities Assets Liabilities is equal to Net Worth. Hence, the real value of a company, i.e., net worth is the real value of shares of a company or, in other words, the real value of shares of a company is the net worth of that company.

The meaning of value may be subjective and objective. Value of a pen for an examinee in the examination hall is subjective, called value -in-use. Its value for a buyer is the monetary value, i.e., its price is objective value, called value-in-exchange. Value of a share means the money value attached to the share. It may be the book value (value written in the books of account), or the price at which it can be sold or purchased. To value the shareholding, multiply the number of shares by the price per share. For example, if the deceased person owned 100 shares and their value was 1091p, the value of the shareholding is 1,091. Knowing what an asset is worth and what determines that value is a pre-requisite for intelligent decision making -- in choosing investments for a portfolio, in deciding on the appropriate price to pay or receive in a takeover and in making investment, financing and dividend choices when running a business. The premise of valuation is that we can make reasonable estimates of value for most assets, and that the same fundamental principles determine the values of all types of assets, real as well as financial. Some assets are easier to value than others, the details of valuation vary from asset to asset, and the uncertainty associated with value estimates is different for different assets, but the core principles remain the same. This introduction lays out some general insights about the valuation process and outlines the role that valuation plays in

portfolio management, acquisition analysis and in corporate finance. It also examines the three basic approaches that can be used to value an asset. Unlisted shares are shares in a private company. They are not listed on a recognized stock exchange and they aren't offered to the general public. Many family businesses are private companies. You can't use the nominal value of the shares for your valuation unless it accurately reflects the open market value. So if the nominal value of the ordinary shares in the company is 1, the nominal value of 1,000 ordinary shares is 1,000 - but this is unlikely to be the market value of the shares. Because there's no active open market for most unlisted shares, you should look at information normally available to shareholders such as the company's accounts and performance status and consider the following factors to help you decide the value:

the value of the company's assets the economic background when the person died the size of the shareholding and the shareholders' rights the company's dividend policy

However you may also need to contact the company secretary or accountant to find out the market value of unlisted shares. Inside the Valuation Process There are two extreme views of the valuation process. At one end are those who believe that valuation, done right, is a hard science, where there is little room for analyst views or human error. At the other are those who feel that valuation is more of an art, where savvy analysts can manipulate the numbers to

generate whatever result they want. The truth does lies somewhere in the middle and we will use this section to consider three components of the valuation process that do not get the attention they deserve the bias that analysts bring to the process, the uncertainty that they have to grapple with and the complexity that modern technology and easy access to information have introduced into valuation. We almost never start valuing a company with a blank slate. All too often, our views on a company are formed before we start inputting the numbers into the models that we use and not surprisingly, our conclusions tend to reflect our biases. We will begin by considering the sources of bias in valuation and then move on to evaluate how bias manifests itself in most valuations. We will close with a discussion of how best to minimize or at least deal with bias in valuations. The bias in valuation starts with the Companies we choose to value. These choices are almost never random, and how we make them can start laying the foundation for bias. It may be that we have read something in the press (good or bad) about the company or heard from an expert that it was under or over value. Thus, we already begin with a perception about the company that we are about to value. We add to the bias when we collect the information we need to value the firm. The annual report and other financial statements include not only the accounting numbers but also management discussions of performance, often putting the best possible spin on the numbers. With many larger companies, it is easy to access what other analysts following the stock think about these companies. Zacks, I/B/E/S and First Call, to name three services among many, provide summaries of how many analysts are bullish and bearish about the stock, and we can often access their complete valuations. Finally, we have the markets own estimate of the value of the company- the market price adding to the mix. Valuations that stray too far from this number make analysts

uncomfortable, since they may reflect large valuation errors (rather than market mistakes). In many valuations, there are institutional factors that add to this already substantial bias. For instance, it is an acknowledged fact that equity research analysts are more likely to issue buy rather than sell recommendations, i.e., that they are more likely to find firms to be undervalued than overvalued. This can be traced partly to the difficulties analysts face in obtaining access and collecting information on firms that they have issued sell recommendations on, and partly to pressure that they face from portfolio managers, some of whom might have large positions in the stock, and from their own firms investment banking arms which have other profitable relationships with the firms in question. The reward and punishment structure associated with finding companies to be under and over valued is also a contributor to bias. An analyst whose compensation is dependent upon whether she finds a firm is under or over valued will be biased in her conclusions. This should explain why acquisition valuations are so often biased upwards. The analysis of the deal, which is usually done by the acquiring firms investment banker, who also happens to be responsible for carrying the deal to its successful conclusion, can come to one of two conclusions. One is to find that the deal is seriously over priced and recommend rejection, in which case the analyst receives the eternal gratitude of the stockholders of the acquiring firm but little else. The other is to find that the deal makes sense (no matter what the price) and to reap the ample financial windfall from getting the deal done.

A philosophical basis for valuation A postulate of sound investing is that an investor does not pay more for an asset than it is worth. This statement may seem logical and obvious, but it is forgotten and rediscovered at some time in every generation and in every market. There are those who are disingenuous enough to argue that value is in the eyes of the beholder, and that any price can be justified if there are other investors willing to pay that price. That is patently absurd. Perceptions may be all that matter when the asset is a painting or a sculpture, but we do not and should not buy most assets for aesthetic or emotional reasons; we buy financial assets for the cashflows we expect to receive from them. Consequently, perceptions of value have to be backed up by reality, which implies that the price we pay for any asset should reflect the cash flows it is expected to generate. Valuation models attempt to relate value to the level of, uncertainty about and expected growth in these cash flows. There are many aspects of valuation where we can agree to disagree, including estimates of true value and how long it will take for prices to adjust to that true value. But there is one point on which there can be no disagreement. Asset prices cannot be justified by merely using the argument that there will be other investors around who will pay a higher price in the future. That is the equivalent of playing a very expensive game of musical chairs, where every investor has to answer the question, "Where will I be when the music stops? before playing. The problem with investing with the expectation that there will be a bigger fool around to sell an asset to, when the time comes, is that you might end up being the biggest fool of all. A measure used by owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly.


Should the company decide to dissolve, the book value per common indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid.

In simple terms it would be the amount of money that a holder of a common share would get if a company were to liquidate. Maximizing Shareholder Value The idea of maximizing shareholder value comes from interpretations of the role of corporate governance. Corporate governance involves regulatory and market mechanisms and the roles and relationships between a companys management, its board, its shareholders, other stakeholders, and the goals by which the corporation is governed. In large firms where there is a separation of ownership and management and no controlling shareholder, the principalagent issue arises between uppermanagement (the "agent") and shareholders (the "principals"). The danger arises that, rather than overseeing management on behalf of shareholders, the board of directors may become insulated from shareholders and beholden to management. Thus, one interpretation of proper financial management is that the agents are oriented toward the benefit of the principals - shareholders - in increasing their

wealth by paying dividends and/or causing the stock price or market value to increase. Maximizing Market Value The idea of maximizing market value is related to the idea of maximizing shareholder value, as market value is the price at which an asset would trade in a competitive auction setting; for example, returning value to the shareholders if they decide to sell shares or if the firm decides to sell. There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are embedded. The Anglo-American (US and UK) "model" tends to emphasize the interests of shareholders. The sole concentration on shareholder value has been widely criticized, particularly after the late-2000s financial crisis, where attention has risen to the concern that a management decision can maximize shareholder value while lowering the welfare of other stakeholders. Additionally, short-term focus on shareholder value can be detrimental to long-term shareholder value. Difference of share and stock In today's financial markets, the distinction between stocks and shares has been somewhat blurred. Generally, these words are used interchangeably to refer to the pieces of paper that denote ownership in a particular company, called stock certificates. However, the difference between the two words comes from the context in which they are used. For example, "stock" is a general term used to describe the ownership certificates of any company, in general, and "shares" refers to a the ownership certificates of a particular company. So, if investors say they own stocks, they

are generally referring to their overall ownership in one or more companies. Technically, if someone says that they own shares - the question then becomes shares in what company. Bottom line, stocks and shares are the same thing. The minor distinction between stocks and shares is usually overlooked, and it has more to do with syntax than financial or legal accuracy.

The main differences between Shares and Stocks are as follows : Stocks are fully paid up whereas shares may be fully paid up or partly paid up. Shares may be issued when a company is incorporated but stock cannot be issued under such circumstances. Only fully paid shares can be converted into stock. Stocks is convenient method of transferring because it can be issued or transferred in fractional parts whereas shares cannot be divided below the face value of each share. Stocks are not numbered whereas shares are serially numbered. Shares are always registered and not transferable by mere delivery but stock man may be registered or unregistered or unregistered stock can be transferred by mere delivery. Conversion of shares into stocks : Conversion of fully paid shares into stock may likewise be affected by the ordinary resolution of the company in the general meeting. Notice of the conversion must be given to the Registrar within 30 days of the conversion, the

stock may be converted into fully paid shares following the same procedure and notice given to the Registrar in Form no 5. In this connection, the following provisions are important :1. Only fully paid shares can be converted into stocks 2. Direct issue of stock to members is not lawful and cannot be done. 3. The difference between shares and stock is that shares are transferable only in complete units so that transfer of half or any portion of share is not possible whereas stock is expressed in terms of any amount money and is transferable in any money fractions. 4. Articles may be give the Board of Directors authority to fix minimum amount of stock transferable. 5. Since stock is not divided into different units it is not required to be numbered. Shares on the other hand must be numbered.

Share valuation: Tax controversies dissected With increasing globalization world over, corporate world has dissolved national boundaries and the multinational enterprises have expanded their footprints worldwide by setting up subsidiaries, joint ventures and other form of enterprises. The growth of these entities although a welcome move, creates complex taxation issues for both tax authorities and the multinational enterprises since diversity in country rules for the taxation of the associated entities of the group cannot be viewed in isolation. In order to tackle the complex issues involved in the transaction between two enterprises of the same group with different tax jurisdiction, the Indian Finance Act 2001 introduced a mechanism on Transfer Pricing (TP) under sections 92 to 92F of the Indian Income Tax, 1961 (the Act). The Indian TP regulations provide that any


income arising from international transactions between associated enterprises should be computed having regard to the arms length price. Some recent changes in Indian Tax Regime The Indian tax authorities have recently amended the definition of International transaction through Finance Bill 2012 to plug such arrangements of issuing shares at a price lower than the arms length price. The ambit of TP provisions has been widened by expanding the definition of international transactions to include capital financing; guarantees; any debt arising during course of business; business reorganizations or restructuring irrespective of whether or not the same has an impact on current years pro fits, income, losses or assets; intangible properties including marketing intangibles, human assets, technology related intangibles, etc.





Firms can always focus on a different objective function. Examples would include maximizing earnings maximizing revenues maximizing firm size maximizing market share maximizing EVA

The key thing to remember is that these are intermediate objective functions.

To the degree that they are correlated with the long term health and value of the company, they work well. Private companies, are done for legal or tax reasons. A partnership has to be valued, whenever a new partner is taken on or an old one retires, and businesses that are jointly owned have to be valued when the owners decide to break up. Businesses have to be valued for estate tax purposes when the owner dies, and for divorce proceedings when couples break up. While the principles of valuation may not be different when valuing a business for legal proceedings, the objective often becomes providing a valuation that the court will accept rather than the right valuation. Shares that calculate interest on a daily basis Some shares calculate interest on a daily basis but the payments are only made once or twice a year, these types of stocks and shares will show either a marking

of 'im' or 'ik' on a daily basis. In these cases you'll need to work out their value from the date the last payment was made until the date of death. If the payment date has been declared the markings change to 'imx' or 'ikx'. If the person died after the payment had been declared but before it was made you should deduct the net interest from the date the person died to the date of the payment. Working out the value of these is complicated and it's a good idea to use a professional valuer to help you. 1. Shareholder value is the best measure of wealth creation for the firm. 2. Shareholder value maximization produces the greatest competitiveness. 3. Shareholder value maximization fairly serves the interests of the companys other stakeholders. 4. To attend general meeting and vote. 5. To a share of the company's profits. 6. To a final distribution on winding up. 7. That the company be run lawful Shares and Assets Valuation (SAV) is a specialist area within HM Revenue & Customs (HMRC) based in Nottingham. In addition to valuing unquoted shares we also value intangible assets (intellectual property, trademarks, patents, goodwill etc), foreign shares, foreign residential property, bloodstock, chattels (things like antiques, art and jewellery), boats, aircraft and a whole range of other assets. When the open market value of any of these assets is relevant to your tax affairs, your Tax Office may instruct SAV to consider and, if necessary, negotiate that value with you. Depending on the circumstances, you may be able to ask SAV to consider the value once the transaction has occurred


and before you file your return, using the Post Transaction Valuation Check (PTVC) service. The cost of shares can be difficult to identify when you sell or dispose of some - but not all - of your shares. You might buy the same type of shares, in the same company, at different times. In some cases you might buy shares of the same class, in the same company, but at different times and prices. When you sell or dispose of some of these shares, share identification rules match the shares you sold with the ones you bought. The rules you must apply are set out below. First match the shares sold or disposed of with shares you bought on that same day. This is the 'same day' rule. If you haven't bought and sold shares on the same day, you move on to the next step. after the sale or disposal. This is the bed and breakfasting' rule. If you haven't bought any shares within 30 days of the sale, you then look at shares bought at any other time. If the shares were acquired on any other date a different rule applies. All shares acquired before the day the shares were sold, of the same type in the same company, are pooled to create a single asset. This is called a 'Section 104 Holding'. If you held shares on 31 March 1982, these are included in the Section 104 Holding at their value on that day, not at their original cost. Companies sometimes reorganise their shares - for example as a result of mergers and take-overs. The cost of the resulting shares is subject to special rules. Applying these rules only becomes relevant when the shares are sold or disposed of. The rules apply when a company has done one of the following:

made a bonus issue or rights issue of shares recognised its share capital in some other way taken over another in exchange for issuing shares in itself

Such a take-over may involve any of the following:


the companies have merged the companies have de-merged there has been some other form of company reconstruction

This page provides some guidance on the points you should consider when preparing/submitting a valuation of some of the main assets SAV considers. If you have any general valuation queries, advisers at the enquiry line detailed below will try to assist where possible. They are only able to provide general guidance and cannot comment on specific valuations or tell you how to carry out a valuation. The cost of shares can be difficult to identify when you sell or dispose of some - but not all - of your shares. You might buy the same type of shares, in the same company, at different times. SAV undertakes the valuation of a wide range of asset for all tax purposes. As there is no active market for most of the assets considered by SAV, decisions from the Courts over the years have provided guidance. When carrying out valuations for tax purposes it is important that they are carried out on the correct basis. Under Self Assessment procedures taxpayers are responsible for either calculating the appropriate amount of tax due or, in the case of individuals, for providing the appropriate figures to enable HMRC to calculate it on their behalf. If a valuation is not provided on the correct basis a taxpayer's tax return may be challenged by HMRC. If following any challenge the valuation has to be adjusted the taxpayer may be faced with having to pay not only interest on any additional tax payable but penalties as well. The correct basis of valuation for tax purposes


The correct basis of valuation for tax purposes is the 'market value' as defined in the relevant statute. The definition of market value for Capital Gains Tax can be found in Section 272 of the Taxation of Chargeable Gains Act 1992, for Inheritance Tax it can be found in Section 160 of the Inheritance Tax Act 1984 and for Stamp Duty Land Tax in Section 118 of the Finance Act 2003. These definitions are all very similar and broadly define market value as: 'The price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price shall not be assumed to be reduced on the grounds that the whole property is to be placed on the market at one and the same time.' The current statutory definitions are similar to those used in earlier Acts and over the years the above definition has been examined by the courts in numerous cases. The case law was usefully summarized by the Court of Appeal in the case of IRC v Gray (Executor of Lady Fox (Deceased) in 1994. The case law has established some important assumptions that must be made when arriving at the market value in accordance with the above definition. The assumptions derived from case law Case law has established the following assumptions:

the sale is a hypothetical sale the vendor is a hypothetical, prudent and willing party to the transaction the purchaser is a hypothetical, prudent and willing party to the transaction (unless considered a 'special purchaser')

for the purposes of the hypothetical sale, the vendor would divide the property to be valued into whatever natural lots would achieve the best overall price (this is the principle of 'prudent lotting')

all preliminary arrangements necessary for the sale to take place have been carried out prior to the valuation date

the property is offered for sale on the open market by whichever method of sale will achieve the best price

there is adequate publicity or advertisement before the sale takes place so that it is brought to the attention of all likely purchasers

the valuation should reflect the bid of any 'special purchaser' in the market (provided they are willing and able to purchase)

In Capital Gains Tax cases the valuation date may be the 31 March 1982 (when required by Section 35(2) of the Taxation of Chargeable Gains Act 1992), or, when it is necessary to assess the market value at the date of actual acquisition or disposal, the date a binding contract was entered into. SAV is happy to deal with you directly on all valuation matters. However, valuation is a specialised subject and can involve highly complex issues, so you may wish to consider appointing a professional adviser, such as, an accountant, solicitor or valuation expert to represent you. If you do, it will gladly liaise with them too. Unquoted shares For any valuation of unquoted shares, whether registered in the UK or a foreign country, you should consider/provide the following information:

The company's performance and financial status as shown in its accounts for, say, the last three years before the date of valuation, and any other information normally available to its shareholders. In the case of foreign companies you will need to provide copies of the accounts for the three years before the date of valuation.


The size of the shareholding, and shareholders' rights. If, for example, the holding is one that would give control of a company, it may be necessary to agree the value of all the company's assets and to have much more information about the company's performance and prospects than is in the published accounts.

The company's dividend policy. Appropriate yields and price earnings ratios of comparable companies or sectors.

The commercial and economic background at the valuation date. A full explanation as to how the suggested value has been calculated, including:

the valuation approach adopted, for example Earnings, Assets, Dividend Yield or industry specific valuation method

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any assumptions or adjustments made all the supporting evidence used.

Need for Valuation The following are the circumstances where need for valuation of shares arises : (i) Where companies amalgamate or are similarly reconstructed, it may be necessary to arrive at the value of the shares held by the members of the company being absorbed or taken over. This may also be necessary to protect the rights of dissenting shareholders under the provisions of the Companies Act, 1956. (ii) Where shares are held by the partners jointly in a company and dissolution of the firm takes place, it becomes necessary to value the shares for proper distribution of the partnership property among the partners. (iii) Where a portion of the shares is to be given by a member of proprietary company to another member as the member cannot sell it in the open market, it

becomes necessary to certify the fair price of these shares by an auditor or accountant. (iv) When a loan is advanced on the security of shares, it becomes necessary to know the value of shares on the basis of which loan has been advanced. (v) When preference shares or debentures are converted into equity shares, it becomes necessary to value the equity shares for ascertaining the number of equity shares required to be issued for debentures or preference shares which are to be converted. (vi) When equity shareholders are to be compensated on the acquisition of their shares by the Government under a scheme of nationalization, then it becomes necessary to value the equity shares for reasonable compensation to be given to their holders. Companies often issue shares to raise capital for operational and strategic reasons. Shares of public companies trade on regulated stock exchanges, where investors can place buy and sell orders. Shares are an integral part of the economy because they are a core component of most investment portfolios. Investors can own shares directly or indirectly through mutual funds. When two or more companies amalgamate. When absorption of a company takes place. When some shareholders do not give their consent for reconstruction of the company, there shares are valued for the purpose of acquisition. When shares are held by the partners jointly in a company and dissolution takes place., it becomes necessary to value theshares for proper distribution of partnership property amongthe partners.




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Our oath We take an oath to advice our investors with absolute honesty and long to help out punctually and diligently. Advantages of Highly Qualified Research team recognized by ATA (Association of Technical Analysts) and EWI (Elliott Wave International) is lead by Shounak Pohankar (CFT) a well Known Technical Analyst and Stock. Specialties ATA Recognized Research Team, Elliott Wave International Affiliation, Automated trading mechanisms for Managing client Portfolios with flexibility.


The Growth of Share Capital: The following graph is stating the growth Share Capital last 6 years.

Authorised Share Capital?



Share capital is the fund which is generated by issue of company share in the market. The amount of the companys share changes with time depending on the performance of the company in the market.


Share in Our Success Shareholding Pattern as on 31 December, 2006

Category 1 2 3 4 5 6 7 8 Tata Group of companies Mutual funds and UTI Banks Financial institutions/ insurance companies FIIs NRIs/foreign nationals Bodies corporate Indian public Total

No. of shares Percentage of issued share held 7744961 1612010 550 2053681 1747328 80714 376282 1534474 15,150,000 10.64 0.00 13.56 11.53 0.54 2.48 10.13 100 capital 51.12

At present, the promoter group holds 7,744,961 equity shares (representing 51.12 per cent of the paid-up share capital of the company).


Besides the above-mentioned equity shares held by the promoter group, none of the promoter group or the directors of the promoter group hold any equity shares in the company. Including natural capital in valuation


Par value is the legal capital of a share of stock. The face value of a share of stock is known as its par value, which is the legal capital of each share of stock. A business must retain this legal capital in its business and may not pay it out as dividends to shareholders. Face value, or par value, has no relation to the market value of stock. Understand the importance of par value in your small business.




PROBLEM OF THE STUDY Using option-pricing models in valuation does have its advantages. First, there are some assets that cannot be valued with conventional valuation models because their value derives almost entirely from their option characteristics. For example, a biotechnology firm with a single promising patent for a blockbuster cancer drug wending its way through the FDA approval process cannot be easily valued using discounted cash flow or relative valuation models. It can, however, be valued as an option. The same can be said about equity in a money losing company with substantial debt; most investors buying this stock are buying it for the same reasons they buy deep out-of-the-money options. Second, option-pricing models do yield more realistic estimates of value for assets where there is a significant benefit obtained from learning and flexibility. Discounted cash flow models will understate the values of natural resource companies, where the observed price of the natural resource is a key factor in decision making. Third, option-pricing models do highlight a very important aspect of risk. While risk is considered almost always in negative terms in discounted cash flow and relative valuation (with higher risk reducing value), the value of options increases as volatility increases. For some assets, at least, risk can be an ally and can be exploited to generate additional value. This is not to suggest that using real options models is an unalloyed good. Using real options arguments to justify paying premiums on discounted cash flow valuations, when the options argument does not hold, can result in overpayment. While we do not disagree with the notion that firms can learn by observing what happens over time, this learning has value only if it has some degree of exclusivity. We will argue that it is usually inappropriate to attach an option premium to value if the learning is not exclusive and competitors can adapt their behavior as well. There are also limitations in using option pricing models to value long-term options on non-traded assets. The assumptions made

about constant variance and dividend yields, which are not seriously contested for short term options, are much more difficult to defend when options have long lifetimes. When the underlying asset is not traded, the inputs for the value of the underlying asset and the variance in that value cannot be extracted from financial markets and have to be estimated. Thus the final values obtained from these applications of option pricing models have much more estimation error associated with them than the values obtained in their more standard applications (to value short term traded options). Shareholder value may be detrimental to a companys worth. When all of a companys focus and strategy is concentrated on increasing share prices, the practice and ethics of the firm can become lost because of the following problems with the shareholder value model. Lack of transparency, Increased Risk Short Term Strategy Alternative: stakeholder value There is a role for valuation at every stage of a firms life cycle. For small private businesses thinking about expanding, valuation plays a key role when they approach venture capital and private equity investors for more capital. The share of a firm that a venture capitalist will demand in exchange for a capital infusion will depend upon the value she estimates for the firm. As the

companies get larger and decide to go public, valuations determine the prices at which they are offered to the market in the public offering. Once established, decisions on where to invest, how much to borrow and how much to return to the owners will be all decisions that are affected by valuation. If the objective in


corporate finance is to maximize firm value1[6] , the relationship between financial decisions, corporate strategy and firm value has to be delineated. As a final note, value enhancement has become the mantra of management consultants and CEOs who want to keep stockholders happy, and doing it right requires an understanding of the levers of value. In fact, many consulting firms have come up with their own measures of value (EVA and CFROI, for instance) that they contend facilitate value enhancement.




SCOPE OF STUDY Valuation models have become more and more complex over the last two decades, as a consequence of two developments. On the one side, computers and calculators have become far more powerful and accessible in the last few decades. With technology as our ally, tasks that would have taken us days in the pre-computer days can be accomplished in minutes. On the other side, information is both more plentiful, and easier to access and use. We can download detailed historical data on thousands of companies and use them as we see fit. The complexity, though, has come at a cost. In this section, we will consider the trade off on complexity and how analysts can decide how much to build into models. The importance of valuation of shares also arises in case of amalgamation of companies when there is the need for having a fair valuation of shares to settle the purchase price. Sometimes preference shares and debentures are converted into equity shares as per the terms of issue. In such case, a fresh valuation method should be adopted for equity shares to calculate the exchange ratio. If the deceased person had shares in an ISA (Individual Savings Account) you should ask the ISA fund manager for a valuation. You should be able to find contact details from paper work held by the deceased person. Use the closing price on the day the person died. If you can't obtain a valuation you should list the shares and value them in the same way as other shares. You can deduct any managers' fees from the valuation. The same applies to PEPs (Personal Equity Plans) and TESSAs (Tax Exempt Special Savings Accounts).


A growing number of companies known for their hard-nosed approach to businesssuch as GE, Google, IBM, Intel, Johnson & Johnson, Nestl, Unilever, and Wal-Marthave already embarked on important efforts to create shared value by reconceiving the intersection between society and corporate performance. Yet our recognition of the transformative power of shared value is still in its genesis. Realizing it will require leaders and managers to develop new skills and knowledgesuch as a far deeper appreciation of societal needs, a greater understanding of the true bases of company productivity, and the ability to collaborate across profit/nonprofit boundaries. Capitalism is an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs, and building wealth. But a narrow conception of capitalism has prevented business from harnessing its full potential to meet societys broader challenges. The opportunities have been there all along but have been overlooked. Businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face. The moment for a new conception of capitalism is now; societys needs are l arge and growing, while customers, employees, and a new generation of young people are asking business to step up. The purpose of the corporation must be redefined as creating shared value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy. The concept of shared value, in contrast, recognizes that societal needs, not just conventional economic needs, define markets. It also recognizes that social harms or weaknesses frequently create internal costs for firmssuch as wasted energy or raw materials, costly accidents, and the need for remedial training to compensate for inadequacies in education. And addressing societal harms and constraints does not necessarily raise costs for firms, because they

can innovate through using new technologies, operating methods, and management approachesand as a result, increase their productivity and expand their markets.



METHOD OF DATA COLLECTION Valuation of shares before buying them is one of the biggest problems that beginners face because they are not familiar with the three main valuation methods that are available to them. So in this blog post and video, I am going to introduce you to those 3 main valuation methods and explain how you can use them to value any business or company and thus its shares. The different methods of valuing shares may be broadly classified as follows : 1. Net Assets Basis (or Intrinsic Value or Break up Value) Method. 2. Earning Capacity (or Yield Basis or Market Value) Method. 3. Dual (or Fair Value) Method. 1 Net Asset Valuation Also known as the Sum of the Parts model, the Net Asset Valuation method involves calculating what all the assets and liabilities of a business are worth and then adding them all up to reach a total. Assets include buildings, machinery, equipment, inventory, cash, investments and so on things that the business owns and could sell to someone else. Liabilities include bank loans, leasing arrangements and goods which the company has bought but not yet paid for i.e. things that the business owes to someone else.


If you were buying the business outright, you would value the company assets and liabilities individually using a process known as due diligence. As share investors, this method is not available to us so we need to get the summary values from the companys Balance Sheet. The Balance Sheet is a key document within every set of accounts and so is available to investors in the half-year (interim) and full-year (final) results. To make it even easier for us, the Net Asset Value (NAV) of a company is usually calculated for us and shown as a separate line in the Balance Sheet. Having got the Net Asset Value for the company, we then divide this by the total number of shares issued by the company to arrive at the net asset value per share or book value per share. This therefore tells us how much each share of the company is worth in terms of its assets and liabilities. We can then compare this with the current actual share price to decide whether the shares are overvalued or undervalued by the stock market. The following points should be considered while valuing of shares according to this method: * Goodwill must be properly valued * The fictitious assets such as preliminary expenses, discount on issue of shares and debentures, accumulated losses etc. should be eliminated. * The fixed assets should be taken at their realizable value. * Provision for bad debts, depreciation etc. must be considered. * All unrecorded assets and liabilities ( if any) should be considered. * Floating assets should be taken at market value.

* The external liabilities such as sundry creditors, bills payable, loan, debentures etc. should be deducted from the value of assets for the determination of net value. The net value of assets, determined so has to be divided by number of equity shares for finding out the value of share. Thus the value per share can be determined by using the following formula:

Value Per Share=(Net Assets-Preference Share Capital)/Number Of Equity Shares Under this method, the value per share is calculated on the basis of disposable profit of the company. The disposable profit is found out by deducting reserves and taxes from net profit. The following steps are applied for the determination of value per share under earning capacity:

Step 1: To find out the profit available for dividend Step 2: To find out the capitalized value Capitalized Value =( Profit available for equity dividend/Normal rate of return) X 100 Step 3: To find out value per share Value per share = Capitalized Value/Number of Shares 2. Yield Or Market Value Of Shares The expected rate of return in investment is denoted by yield. The term "rate of return" refers to the return which a shareholder earns on his investment. Further it can be classified as (a) Rate of earning and (b) Rate of dividend. In other words, yield may be earning yield and dividend yield. a. Earning Yield


Under this method, shares are valued on the basis of expected earning and normal rate of return. The value per share is calculated by applying following formula: Value Per Share = (Expected rate of earning/Normal rate of return) X Paid up value of equity share Expected rate of earning = (Profit after tax/paid up value of equity share) X 100

b. Dividend Yield Under this method, shares are valued on the basis of expected dividend and normal rate of return. The value per share is calculated by applying following formula: Expected rate of dividend = (profit available for dividend/paid up equity share capital) X 100

Value per share = (Expected rate of dividend/normal rate of return) X 100 Under this method, the value per share is calculated on the basis of disposable profit of the company. The disposable profit is found out by deducting reserves and taxes from net profit. The following steps are applied for the determination of value per share under earning capacity: Step 1: To find out the profit available for dividend Step 2: To find out the capitalized value Capitalized Value =( Profit available for equity dividend/Normal rate of return) X 100 Step 3: To find out value per share Value per share = Capitalized Value/Number of Shares

3. Dual (or Fair Value) Method This method is also known as Intrinsic Value Method, Asset Backing Method, Equity Method, Assets Balancing Method or Assets Valuation Method. Suffice it to say that this is the method that the stock market analysts and professional investors use but it is not a method that I would suggest beginners use unless you are an accountant. All three methods have their benefits and drawbacks no single method is best for everything. The best one to use for your company/shares will depend on what kind of company it is. For asset rich businesses like property firms, the Net Asset Value method is the most useful. For companies with few assets, the P/E ratio comparison method is widely used. I use these first two methods all the time for more information on the PE Ratio and its sister asset related PBV ratio. The DCF method is best used by professional investors when buying high growth companies or those with predictable cash flows. The problems relating to valuation of shares may be discussed under the following broad heads: (A) Valuation of Equity Shares. After arriving at the value of the business if we eliminate the value due to the preference shareholders, the remainder belongs to the equity shareholders. Therefore, very simply,

Value Per Equity Share = Value of Business due to Equity Shareholders / No. of Equity Shares. The Value of the business is arrived at by two methods Asset-based or Yieldbased. Before we proceed, lets understand how to deal with different classes of equity shares.

Equity Value and Per Share Value

The conventional way of getting from equity value to per share value is to divide the equity value by the number of shares outstanding. This approach assumes, however, that common stock is the only equity claim on the firm. In many firms, there are other equity claims as well including: warrants, that are publicly traded management and employee options, that have been granted, but do not trade conversion options in convertible bonds contingent value rights, that are also publicly traded. The value of these non-stock equity claims has to be subtracted from the value of equity before dividing by the number of shares outstanding. A warrant is a security issued by a company that provides the holder with the right to buy a share of stock in the company at a fixed price during the life of the warrant. A warrant is therefore a long term call option on the equity of the firm and can be valued using option pricing models. Warrants and other equity options issued by the firm are claims on the equity of the firm and have to be treated as equity, which has relevance for:


estimating debt and equity for the leverage calculation estimating per share value from total equity value (B) Valuation of Preference Shares. You would first have to start by checking whether they are preference shares or equity shares. Obviously, the criteria for valuation of these types differ. Preference shareholders have fixed dividend rights as well as right to priority in repayment of their capital. To equity shareholders on the other hand, belongs the entire business after settling off the claim of preference shareholders. Let us start with the valuation of the preference shares first. The formula for valuation is Actual Yield from Preference Share x Face Value of Preference Share = Expected Yield from Preference Shares Now let us try to apply this formula to a problem. Assume that the preference shares of a particular company carry a right to dividend, say 12% [actual yield in the above formula]. Now well have to narrow down as to what is the expected yield from this company for its preference shares. We start with the industry rate of expectation for preference shares say 11%. Then we check the capacity of the company on the two performance parameters: a. ability to repay the preference capital b. ability to pay the preference dividend Preference Shares are shares which have preference over ordinary shares for payment of dividend or return of capital. However, they are junior to all forms of company debt, including debentures, loan notes and bank debt on a winding-up.

A company can be put into administration if it fails to pay interest on its debt, but preference dividends, like ordinary dividends, are paid at the discretion of directors. The level of discretion will depend on the terms of the prospectus with the payment of dividends on some preference shares being mandatory providing certain conditions (for example sufficient distributable reserves and capital adequacy) are met while for others the directors can have absolute discretion. This means that preference shareholders have no recourse to the company in the event of non-payment, although the company will not be able to pay an ordinary dividend until preference dividends have been paid.

Some Preference


are cumulative

which means



company must pay any dividend arrears from previous years before it can pay an ordinary dividend. Most bank Preference Shares are non-cumulative and were issued by banks to boost their tier 1 capital bases.

Purchases of Preference Shares, like ordinary shares, are subject to 0.5% stamp duty. The capital gains and income tax treatment is also the same as for ordinary shares. Preference shares are usually dealt "dirty price" i.e. with accrued dividend in the dealing price, and not dealt separately as with bonds.

Types of Preference Shares 1.Cumulative or Non-cumulative : A non-cumulative or simple preference shares gives right to fixed percentage dividend of profit of each year. In case no dividend thereon is declared in any year because of absence of profit, the holders of preference shares get nothing nor can they claim unpaid dividend in the subsequent year or years in respect of that year. Cumulative preference shares however give the right to the preference shareholders to demand the unpaid dividend in any year during the subsequent year or years when the

profits are available for distribution . In this case dividends which are not paid in any year are accumulated and are paid out when the profits are available. 2.Redeemable and Non- Redeemable : Redeemable Preference shares are preference shares which have to be repaid by the company after the term of which for which the preference shares have been issued. Irredeemable Preference shares means preference shares need not repaid by the company except on winding up of the company. However, under the Indian Companies Act, a company cannot issue irredeemable preference shares. In fact, a company limited by shares cannot issue preference shares which are redeemable after more than 10 years from the date of issue. In other words the maximum tenure of preference shares is 10 years. If a company is unable to redeem any preference shares within the specified period, it may, with consent of the Company Law Board, issue further redeemable preference shares equal to redeem the old preference shares including dividend thereon. A company can issue the preference shares which from the very beginning are redeemable on a fixed date or after certain period of time not exceeding 10 years provided it comprises of following conditions :1. It must be authorized by the articles of association to make such an issue. 2. The shares will be only redeemable if they are fully paid up. 3. The shares may be redeemed out of profits of the company which otherwise would be available for dividends or out of proceeds of new issue of shares made for the purpose of redeem shares. 4. If there is premium payable on redemption it must have provided out of profits or out of shares premium account before the shares are redeemed. 5. When shares are redeemed out of profits a sum equal to nominal amount of shares redeemed is to be transferred out of profits to the capital redemption reserve account. This amount should then be utilised for the purpose of redemption of redeemable preference shares. This reserve can

be used to issue of fully paid bonus shares to the members of the company. 3.Participating Preference Share or non-participating preference shares : Participating Preference shares are entitled to a preferential dividend at a fixed rate with the right to participate further in the profits either along with or after payment of certain rate of dividend on equity shares. A non-participating share is one which does not such right to participate in the profits of the company after the dividend and capital have been paid to the preference shareholders. Share certificate A share certificate is a document issued by the company stating that the person named therein is the registered holder of specified number of shares of a certain class and they are paid up upto the amount specified in the share certificate. The share certificate must bear the common seal of the company and also must be stamped under the relevant stamp act. One or more directors must sign it .It should state the name as well as occupation of the holder and number of shares , their distinctive number and the amount paid up. Every company making allotment of shares must deliver the share certificate of all shareholders within three months of allotment. In case of transfer of shares, the share certificate must be ready for delivery within two months after the shares are lodged with the company for transfer. If default is made in complying with the above provisions, the company and every officer of company who is in default is liable to punishment by way of fine which may extent to Rs500 for every day of default. The allotee must give notice to the company reminding of its obligation and even then, if default is not made good within 10 days of the notice, the allotee may apply to the Company Law Board for direction to the company to issue such share certificate in accordance with the Act. Application

for this purpose must be made with the concerned regional bench of the Company Law Board by way of petition. The petition should be accompanied by the following documents :1. Copy of the letter of allotment issued by the company 2. Documentary evidence for the allotment of the shares or debentures for transfer 3. Copy of the notice served on the company requiring to make good the default 4. Any other correspondence 5. Affidavit verifying the petition 6. Bank draft evidencing payment of application fee 7. Memorandum of appearance with the Board copy of resolution of the board for the executive Vakalat Nama as the case may be Companies act does not prescribe any form for share certificate. A Shareholder must keep his share certificate in safe custody or in case of shares which are traded in demat mode, with the depository. The company may renew or issue a duplicate certificate if such certificate is proved to have been lost or destroyed or having being defaced or mutilated or torn or is surrendered to the company. However, if the company, with the intention to defraud issues duplicate certificate, the company shall be punishable with the fine upto Rs10000 and every officer of the company who is in default with imprisonment upto 6 months or fine upto Rs10000 or both. Once a share certificate is issued by the company, the name of the person in whose favour it has been issued becomes the registered shareholder. Nobody can then deny the fact of his being the registered shareholder of the company. Similarly, if the certificate states that on each of shares a certain amount has been paid up, nobody can deny the fact that such amount has been paid up




CONCLUSION Valuation plays a key role in many areas of finance -- in corporate finance, in mergers and acquisitions and in portfolio management. The models presented will provide a range of tools that analysts in each of these areas will find of use, but the cautionary note sounded in this introduction bears repeating. Valuation is not an objective exercise, and any preconceptions and biases that an analyst brings to the process will find their way into the value. The company fails, the lenders may claim in the liquidation for the return of their money as creditors of the company. If the loans have been secured by the company issuing debentures to the three shareholder/directors, they may rank as secured creditors, which will put them in a more advantageous position than the ordinary creditors. There may be good reasons as between the three

shareholders why they should want to see that the money committed by the others is in the form of share capital. The decision as to the capitalization of a company should usually be taken with appropriate legal and accountancy advice. Company Law Solutions provides an expert service for all your company law requirements, including share allotments, transfers and shareholders' agreements. This is especially important to those that are either near or currently in their retirement years. We contend that all this talk about how dangerous it is to invest in stocks is overblown. The evidence clearly confirms that if you invest in great businesses at sound valuations, long-term risks are relatively low and returns more than adequate to meet your needs. To put this into another context, although it does happen, the failure of a great business is a relatively rare occurrence. However, market mispricing, especially when it overvalues a great business, is much more common. Moreover, the


biggest losses will generally occur more from overvaluation than any failure on the business behind the companys part. On the other hand, its also important to distinguish between the various levels of overvaluation. In some cases, a slight or even a moderate overvaluation of a companys shares, even a great company, will moderately increase risk while simultaneously lowering long-term return. However, in the long run these situations may not be devastating, especially for best-of-breed companies. Influencing Businesses Shareholders have the right to participate and vote in annual general meetings. Small individual shareholders holding a few hundred shares may not be able to influence companies. However, when these small investors join with mutual funds and other institutional shareholders, they can influence corporate boards and senior management to change strategic direction. Investors can influence corporate strategy by simply abandoning the shares of under-performing companies, thus driving share prices down and forcing the board to make the necessary changes. Healthy companies mean a healthy company, which benefits everybody. In conclusion, its important to have a sound perspective on valuation. Calculating current and future earnings yields are a straightforward and simple method of accomplishing that task. When the earnings yield on stocks, which is the inverse of the PE, is very low it should be obvious that there is not enough return being generated by the companys fundamentals to compensate for the risk you are taking by owning them. This situation occurs most often when the stock is experiencing great price momentum. The more the stock rises, the more it attracts investors as the greed response takes hold.



Equity refers to the portion of a business assets that was acquired using its own resources without needing to be indebted to other economic entities. Equity investments refer to the purchase and holding of the capital stock shares of corporations, which often represent ownership in those businesses. Valuating a business equity investments in other businesses, meaning to gauge their value and then record it, is performed using either the cost method, the equity method or consolidated financial statements. No single one of these methods is superior to the others in all situations and each possesses its own limitations. Limitations on Share Ownership and Limitations on the Ability of Our Stockholders to Effect a Change in Control of Our Company May Prevent Takeovers That are Beneficial to Our Stockholders. One of the requirements for maintenance of our qualification as a REIT for federal income tax purposes is that no more than 50% in value of our outstanding capital stock may be owned by five or fewer individuals, including entities specified in the Internal Revenue Code, during the last half of any taxable year. Our charter contains ownership and transfer restrictions relating to our stock primarily to assist us in complying with this requirement; however, the restrictions may have the effect of preventing a change of control, which does not threaten REIT status. These restrictions include a provision that generally limits a person from beneficially owning or constructively owning shares of our outstanding equity stock in excess of a 9.9% ownership interest, unless our board of directors exempts the person from such ownership limitation, provided that any such exemption shall not allow the person to exceed 13% of the value of our outstanding equity stock. These provisions may have the effect of delaying, deferring or preventing someone from taking control of us, even though a change of control might


involve a premium price for our stockholders or might otherwise be in our stockholders best interests. Under the terms of our shareholder rights plan, our board of directors can, in effect, prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock. Unless our board of directors approves the persons purchase, after that person acquires more than 15% of our outstanding common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value. Purchases by other stockholders would substantially reduce the value and influence of the shares of our common stock owned by the acquiring person. Our board of directors, however, can prevent the shareholder rights plan from operating in this manner. This gives our board of directors significant discretion to approve or disapprove a persons efforts to acquire a large interest in us. Section 382 of the Internal Revenue Code generally requires a corporation to limit the amount of its income in future years that can be offset by historic losses, i.e. net operating loss (NOL) carry forwards and certain built-in losses, after a corporation has undergone an ownership change. In this issue of the Tax Insight we will provide an overview of the Section 382 limitation and valuation considerations with respect to the calculation of the Section 382 limitation. SECTION 382 BASICS A loss corporation is a corporation that is entitled to use a tax attribute carryover, such as an NOL, or a corporation with a net unrealized built-in loss. The following basic example shows the application of Sec. 382: Alpha Corporation is a highly successful corporation wishing to acquire 100% of the stock of an unrelated company,


Zeta Corporation. Zeta Corporation is a private company with valuable IP which was funded with several rounds of preferred financing. Zeta Corporation has generated net operating losses during every tax year since inception. Thus, it is a loss corporation. After the acquisition, Section 382 will limit the amount of Zeta NOLs available to offset the groups future taxable

income. In addition, the Zeta NOLs may be subject to additional Section 382 limitations caused by earlier ownership changes incurred during the rounds of financing. The two major components of Sec. 382 are ownership change and limitation. An ownership change occurs if immediately after an owner shift or an equity structure shift, there is a greater than 50% change in the value of the stock owned by five percent shareholders during the testing period (generally three years). An ownership change is triggered by the purchase and sale, redemption, or new issuance of stock.

The factors which influence the value of shares can be broadly classified into two groups- internal and external factors. They are stated below(i) Internal factors: 1. Net worth of Assets (realizable value of all assets minus all liabilities) 2. Earning capacity of assets

3. Return on investments 4. Profit after tax 5. Profit available to equity shareholders 6. Earnings per share 7. Dividend per share or Rate of dividend.

(ii) External Factors: 1. General economic condition of the country. 2. Political and social environment. 3. International economic scenario. 4. International political environment. 5. Demand for shares. 6. Growth prospect of the industry. 7. Transparency in information flow. 8. Insider trading 9.General impulse in capital and securities market. 10. Investors education and their perspective towards capital market.


**Suggestions** Before determining whether the price of the stock-listed shares reflects their fair value, let us consider the issue of different levels of the value. Thus, from the perspective of shareholders of stock-listed companies. This approach seems to be further substantiated by the analysis of premiums paid by investors as they call tender offers for selling shares during which a purchase of a controlling stake is planned. Such premiums reflects a difference between the level of the liquid minority interest and the level of the controlling stake, or, in some instances, the level that comprises the synergy-arising benefits (e.g. obtainable by investors after taking over control) (level 1) or the irrational value (e.g. taking into consideration investors sentiment). Use form IHT35 to claim relief when you sell 'qualifying investments' that were part of the deceased's estate at a loss within 12 months of the date of death. Qualifying investments are general shares or securities listed on a recognized stock exchange and/or holdings in authorized unit trusts. You need to include all qualifying investments sold, not just those sold at a loss. Shares and Assets Valuation (SAV) is a specialist area within HM Revenue & Customs (HMRC) based in Nottingham. In addition to valuing unquoted shares we also value intangible assets (intellectual property, trademarks, patents, goodwill etc), foreign shares, foreign residential property, bloodstock, chattels (things like antiques, art and jewellery), boats, aircraft and a whole range of other assets. When the open market value of any of these assets is relevant to your tax affairs, your Tax Office may instruct SAV to consider and, if necessary, negotiate that value with you. Depending on the circumstances, you may be able to ask SAV to consider the value once the transaction has occurred and before you file your return, using the Post Transaction Valuation Check (PTVC) service.

This page provides some guidance on the points you should consider when preparing/submitting a valuation of some of the main assets SAV considers. If you have any general valuation queries, advisers at the enquiry line detailed below will try to assist where possible. They are only able to provide general guidance and cannot comment on specific valuations or tell you how to carry out a valuation. The basis of valuation for tax purposes SAV undertakes the valuation of a wide range of asset for all tax purposes. As there is no active market for most of the assets considered by SAV, decisions from the Courts over the years have provided guidance. The correct basis of valuation for tax purposes The correct basis of valuation for tax purposes is the 'market value' as defined in the relevant statute. The definition of market value for Capital Gains Tax can be found in Section 272 of the Taxation of Chargeable Gains Act 1992, for Inheritance Tax it can be found in Section 160 of the Inheritance Tax Act 1984 and for Stamp Duty Land Tax in Section 118 of the Finance Act 2003. The date of valuation In Capital Gains Tax cases the valuation date may be the 31 March 1982 (when required by Section 35(2) of the Taxation of Chargeable Gains Act 1992), or, when it is necessary to assess the market value at the date of actual acquisition or disposal, the date a binding contract was entered into.


**BIBLIOGRAPHY ** Financial Management by S. M. Inamdar, Everest Publishing house, 12th Edition 2004. Investment Analysis and Portfolio Management by Prasanna Chandra, Tata McGraw Hill Publishers 1/E, 2002 Google Management Accounting: Theory and Problems, M.Y. Khan, P.K. Jain, TMH