Valuation Of Shares

Earning Capitalization
Method (ECM)

Dividend Capitalization
Method

Fair Value
Method

Fair Value = Intrinsic Value + ECM

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 Calculation Of Value on Intrinsic Value Basis

Also Known as :

Intrinsic Value
Net Asset Value
Break up Value
Net Worth Per Share
Book Value Per Share

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Valuation of Intrinsic Value :

Sundry Assets ----------

Less: Sundry Liability ----------

Add: Goodwill ( Revalued) ----------

Add: Non Trade Investment ----------
Less: Preference Share Capital and
Dividend in Arrear ----------
Add: Notional Calls ----------
Net Asset For ESH ======
Divided By No. of Shares ----------

Intrinsic Value
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Note: Goodwill will always be calculated for the purpose of
Intrinsic Value

Note: Sundry Asset and Liability are after :

Revaluation
Rectification
New Policy etc.

Note: Always Calculate Intrinsic Value on Ex Dividend

Basis.

Intrinsic Value = Int. Value + Div Per

Cum Dividend Ex Dividend Share

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1. Earning Yield Method /
Earning Capitalization Method / Yield Method

= Earning Rate Paid Up Share Capital Per Share

NRR

Future Marketable - Non Trade Inv.

Profit Income Net of tax
Earning Rate = x 100
Share Capital

Use : Where large no. of shares is to be valued ( Big Lots)

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2. Dividend Capitalization Method

Dividend Rate x Paid up share cap per share

Normal Rate of return

Dividend Rate is rate of Dividend Company is expected to

pay.

Normal Dividend Rate is NRR.

This method is applied for Small Lot of shares.

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3. Fair Value Method

Fair Value = Intrinsic Value + ECM

2

This method is to be used for valuation of

shares for controlling Interest.

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How to Calculate Normal Rate of Return

NRR of Industry is taken as Base ---------

Add: Risk Factor % Assumed ---------

( Risk Premium for each risk)

Ke of Companies NRR

Risk Factors:
1. Dividend Track Record
2. Dividend Coverage Ratio
3. Asset Backing Ratio
4. Debt Equity / Capitalwww.SafeeCollege.com
Gearing Ratio 8
Equity Dividend Coverage Ratio =

PAT Preference Dividend with CDT

Equity Dividend

Preference Dividend Coverage Ratio =

PAT

Preference Dividend

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Asset Backing Ratio =

Intrinsic Value Per Share

Paid up value per Share

Capital Gearing Ration =

Debt + Preference Share Holder

Equity Losses Preference Share Holder

Debt Equity =
Debt
Equity
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4. Valuation of Business
It can be on the basis of:
1. Shares
2. Cash Flows

1. Value as per Share = Number of Value of

Shares Shares

Value per share can be : MP , Intrinsic Value , Fair Value , ECM , DCM

2. Value of Business on Cash Flow Basis =

Cash flow of Business Discount Factor

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