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Valuation of Shares
CA Final Paper 1 Financial Reporting Chapter 9 Unit5
Prof. Deepak Jaggi
Learning Objectives
Contd
Circumstances Warranting Valuation
Continued..
Contd
Circumstances Warranting Valuation
Continued..
Contd
Circumstances Warranting Valuation
Continued..
Continued..
Need for Valuation
Continued
2. Profit
based
Yield Method
3. Asset &
Profit based
Fair Value Method
Continued
Other Methods of Share
Valuation
DCF Approach
Others i.e. Discounted Cash
Flow Approach
Method I
Net Assets Method
Different Names
Balance Break Up Asset Intrinsic
Sheet Value Backing Value
Method Method Method Method
Method I
Net Assets Method Continued
Pessimistic Approach
Liquidation Assumption
Method I
Net Assets Method Continued
Suitability
Unquoted
Equity Shares
Amalgamation Sick Company Lenders
forming part
of wealth
Method I
Net Assets Method Continued
1. Net Assets
for Equity 2. Value per
Share Holders Share
Conti.
Method I
Net Assets Method Continued
Step 1. Net Assets for Equity Share Holders (NA for ESH)
Continued
Method I Net Assets Method Question
Practice Manual (Question No.14) . Conti..
Further Information:
(i) Return on capital employed is 20% in similar businesses.
(ii) Fixed assets are worth 30% more than book value. Stock is overvalued by
Rs.1,00,000, Debtors are to be reduced by Rs.20,000. Trade investments, which
constitute 10% of the total investment are to be valued at 10% below cost.
(iii) Trade investments were purchased on 01.04.2011. 50% of Non-Trade
Investments were purchased on 01.04.2009 and the rest on 01.04.2010. Non-
Trade Investments yielded 15% return on cost.
(iv) In 2009-2010 new machinery costing Rs.2,00,000 was purchased, but wrongly
charged to revenue. This amount should be adjusted taking depreciation at 10%
on reducing value method.
(v) In 2010-2011 furniture with a book value of Rs.1,00,000 was sold for RS.60,000.
(vi) For calculating goodwill two years purchase of super profits based on simple
average profits of last four ears are to be considered. Profits of last four years are
as under:
(vii) 2008-2009 Rs.16,00,000, 2009-2010 Rs.18,00,000, 2010-2011 Rs.21,00,000,
2011-2012 Rs.22,00,000
(viii) Additional depreciation provision at the rate of 10% on the additional value of
plant and Machinery alone may be considered for arriving t average profit.
Find out the intrinsic value of the equity Share. Income Tax and Dividend tax are not
to be considered.
Method I Net Assets Method Question
Practice Manual (Answer No.14) .
(1) Future maintainable profit
Step 1 Continued.
Continued
Method I Net Assets Method Question
Practice Manual (Answer No.14) . Continued..
Continued
Method I Net Assets Method Question
Practice Manual (Answer No.14) . Continued..
(7) NA for ESH
Continued.
Method II Yield Method
Continued
Continued.
Method II Yield Method
Continued
Average Profits X
+ / - Future Adjustments X
---------
X
Continued.
Method II Yield Method
Steps Continued
OR
(3) Capitalized Value of FMP
100
= FMP for ESH x ---------------------
Expected Yield
Continued.
Method II Yield Method
Steps Continued
(4) VPS
Actual Dividend
If Dividend Basis = --------------------------- x Paid up Value
Expected Dividend
Actual EPS
If Earnings Basis = ------------------ x Paid up Value
Expected EPS
The normal return on equity shares of companies similarly placed is 15% provided:
a) The profit after tax covers the fixed interest and fixed dividends at least four time.
b) Equity capital and reserves are 15% of debentures and preference capital.
The company has been paying regularly an equity dividend of 18%. Ascertain the vale of each equity shares of the
company.
Yield Method Answer
(1.) F.M.P. for ESH
Average Profits 4,00,000
Continued.
Yield Method Answer
Continued.
(2) Expected Yield = 15% provided
Continued.
Yield Method Answer
Continued.
Hence both the conditions failed. Hence there is additional risk involved while
investing in this Co. The additional risk must be justified by additional gain. The
additional expected return may depend upon the perception of risk on the part of
decision maker which is very subjective. Hence say 1% per condition not satisfied
is a additional return expected. Hence expected yield would be worked out as
follows:-
Expected Yield
b) 5% of Profits undistributed
5% of [1,60,600 9,00,000]
5% x 70,600 3,530
57,530
57,530
Actual Yields = ----------- x 100
5,00,000
= 11.51%
5. V. P. S.
11.51
= --------- x 10 (assumed)
17
= 6.77 per share
Method III - Fair Value
Continued.
Valuation of Preference Shares
Continued.
Valuation of Preference Shares
Special Cases
Continued.
Valuation of Preference Shares
Special Cases
NA Method
Valuation of VPS = NA for ESH /
Equity Shares No. of Equity
Shares