Other methods of Valuation

Earnings Capitalisation method

Net Asset Value method
Stock and Debt Method
 Earnings Capitalisation Method
Value of a business = Future Maintainable profits / Relevant capitalisation factor

Value of equity = Value of business – Value of debt

Value per share = Value of equity / no. of equity shares

Kavry Industries is expected to generate future profits of Rs. 54 lacs. What is the
value of the business if investments of this type are expected to give an annual
return of 18%
For a company, profit after tax for the current year amount to Rs.44.80 lacs
( tax rate 30%). This includes Rs. 4 lac extraordinary income. Besides the
company has earned interest income of Rs.1 lakh as marketable securities . It
is not usual for the company to have surplus funds for such investment. The
management expects an additional amount of Rs. 5 lacs to be spent on
advertisement in years to come. The capitalisation rate applicable to similar
businesses is 15%
Determine the value of business and value per equity share using earnings
capitalisation method.
Equity – Rs. 140 crs ( 1 lac shares)
Sundry creditors – Rs.30 crs
Assets – Rs. 170 crs

FMP – PBT – 64 -4 -1-5 = 54 (1-0.30) / 0.15 = 252 L

Net Asset Method

a)Value of equity = Value of assets available for equity shareholders = Net worth

b)Net worth = Total Assets – Total External liabilities

c)Value of assets may be book values , adjusted book values or replacement

values

d) Value per share = Net worth / no. of equity shares

The Balance Sheet of a company is give as:
Liabilities Amt. Rs. Assets Amt Rs.
crs crs
Share Capital ( Rs.100/-) 100 Land and Buildings 40
Reserves and Surplus 40 Plant and Machinery 80
Sundry creditors 30 Marketable securities 10
Inventories 20
Debtors 15
Cash and Bank 5
170 170

Market values of Land and Buildings and P/M are estimated at Rs.90 lacs and
Rs.100 lacs resp. Inventories and debtors are to be written off by 5%.
Determine value of business, value for equity and value per share.
Stock and Debt Approach

Value of business = Market value of equity + market value of debt