How Valuate Shares &amp Intangible Assets

HOW TO VALUATE SHARES &
INTANGIBLE ASSETS
by :
DR. T.K. JAIN
AFTERSCHO☺OL
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5 DECEMBER 09
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Why do we need to undertake
valuation of shares ?
1. when we are paying tax (wealth tax / gift tax
/ income tax / other taxes)
2. mergers and amalgamation of companies
3. issue of shares to employees
4. when there is need for reconstruction of the
capital of the company
5. to show the value in books of accounts
6. other reasons as required by law
What are the methods of valuation
of shares ?
There are 2 mthods :

1. net assets basis and
2. earning capacity or yield basis.
What are the methods in Net
Assets Based valuation methods?
We have 3 methods of valuation in Net Assets

based valuation methods.
1. break up value method
2. Book value method
3. Appraisal value method
When is break up value method
more useful?
When we are undertaking valuation of a sick

company / closed company / a company
which is not likely to remain operational
When is book value method more
useful?
For the purpose of taxation, and other similar

formalities
When is appraisal value method
more useful ?
When we are undertaking valuation for the

purpose of purchase / sale of shares etc.
How to undertake valuation in net
assets based methods ?
Find the value of assets, deduct the value of
liabilities, find net assets. Divide net assets
by number of shares to get the value of each
share.
Example : Assets = 100, liabilities = 40,
number of shares are 5,
(100-40)/5 = 12 per share
so here the value
5 DECEMBER 09
of share is 12.
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What is the difference between
the three methods in Net Assets
Based methods ?
Break up value method – here we find the break up value
of each asset – (what value we will get if we sell this
asset)
Book value method looks at book value (from the
accounts of the company), appraisal value method
looks at value based on appraisal by experts /
independent valuers
The value of share will be different in each of these three
methods.
What is earning capacity / yield
method ?
Here the value of share is calculated by either

of the following :
1. dividend
2. earning capacity
How to value share using
dividend method ?
Find the value of share using the following

formula :
(Dividend rate / normal dividend rate) * Paid
up value of a share
How to value share using earnings
method ?
We will use the following formula for

determination of value of share : -
(earnings rate / normal earnings rate) * Paid
up value of a share
How to find normal rate of
return ?
It is a crucial issue. The value of the share is
based on normal rate of return. If we are
prudent, we will be able to fix appropriate
normal rate, thus the valuation will be
proper.
Normal rate depends on many factors and on
the overall expectations of the investors.
Factors affecting normal rate of
return?
1. whether it is secured or unsecured

2. investors expectations of risks
3. investors' perception of industry trend,
future direction, likely risk
4. returns available in other sectors
Example ....
Normal rate of return for government bonds

will be less than corporate bonds, the normal
rate for corporate bonds will be less than
preference shares, which will also be less in
comparison to equity shares.
It all depends on investor's expectations of
risks attached to the instruments
How to value share using fair
value method ?
Fair value method is arithematic mean of Net

assets based value and yield based value.
Thus its formula :
= (Net assets based value + yield value) / 2
How to value intangible assets ?
There are three important methods :

1. cost of the asset
2. future earning potential
3. if acquired in exchange of securities – then
the value of the securities which have been
exchanged
What is intangible asset?
Non-Monetary asset – which doesn't have

physical bases, but it can generate income
for the enterprise in future.
What are the characteristics of
intangible assets?
1. identifiability
2. control over a resource
3. expectation of future economic benefits
flowing to the enterprise.
Is goodwill an intangible asset?
Yes, but we DONT value goodwill and show

in accounts, unless we have actually paid
price for acquisition of goodwill
Example of intangible assets?
Designs / drawings
Patents
Trademark
Copyright
know-how
Software
How to record cost of intangible
assets?
Intangible assets should be values only if :

1. it is going to generate future economic
benefits
2. its costs can be reliably measured.
As soon as these critiria are fulfilled, we have
to undertake costing of the intangible assets.
What are the accounting standards
on valuation of intangible assets?
AS 26 : It is the main document in India for

valuation of intangible assets.
If Intangible assets have been acquired /
purchased through amalgamation etc. Read
AS 14 for accounting standards.
What are the different phases in
intangible assets?
There are two phases in intanble assets :

1. research phase
2. development phase
No Intangible assets should be recognised
during research phase. They should be
recognised only during development phase.
When does the development
phase start ?
When the intangible assets has been approved
through feasibility study and it has been
found fit to :
1. to generate economic benefit for the
enterprise
2. it can be sold out in the market
3. it can be used commercially in production /
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HOW TO VALUATE SHARES &

There are 2 mthods :

We have 3 methods of valuation in Net Assets

When we are undertaking valuation of a sick

For the purpose of taxation, and other similar

When we are undertaking valuation for the

Here the value of share is calculated by either

Find the value of share using the following

We will use the following formula for

1. whether it is secured or unsecured

Normal rate of return for government bonds

Fair value method is arithematic mean of Net

There are three important methods :

Non-Monetary asset – which doesn't have

Yes, but we DONT value goodwill and show

Intangible assets should be values only if :

AS 26 : It is the main document in India for

There are two phases in intanble assets :

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