Valuation of Shares | Advanced Corporate Accounting - B Com PDF Download

 Page 1


 
INTRODUCTION
In unit 11, we have learnt about the meaning of goodwill, characteristics, nature, need for the 
valuation of goodwill, factors affecting the value of goodwill and finally the methods of 
valuation of goodwill.  In this unit, we shall learn about the concept of valuation of shares, 
need for the valuation of shares, factors affecting the valuation of shares and methods of 
valuation of shares. There are many reasons for the valuation of shares but usually valuation 
of shares of the company is done because of two main reasons.
 
f a
Valuation	of	Shares
Page 2


 
INTRODUCTION
In unit 11, we have learnt about the meaning of goodwill, characteristics, nature, need for the 
valuation of goodwill, factors affecting the value of goodwill and finally the methods of 
valuation of goodwill.  In this unit, we shall learn about the concept of valuation of shares, 
need for the valuation of shares, factors affecting the valuation of shares and methods of 
valuation of shares. There are many reasons for the valuation of shares but usually valuation 
of shares of the company is done because of two main reasons.
 
f a
Valuation	of	Shares
 
(i) Where there is no market price of the shares as in the case of proprietary 
companies.
(ii) Where for the special reasons, the market price does not reflect the true or 
intrinsic value of the share.
MEANING OF VALUATION OF SHARES
The problem of valuation of shares does not arise if the shares are quoted on the stock 
exchange as it provides the ready means for ascertaining the value placed on such shares by 
the buyers and sellers. Even sometimes the quotations of the stock exchange does not present 
the true value of the shares, so the valuation of shares has to be done by the expert valuer by 
adopting sound and the reasonable basis. The provisions are made by the various tax laws for 
the valuation of shares and the exact procedure to be followed has also been laid out. 
Valuation of shares is the process of knowing the value of a company’s shares. Share 
valuation is done based on quantitative techniques. Value of share will vary depending on the 
market demand and supply. The share price of the listed companies which are traded publicly 
can be known easily. But shares of private companies are not publically traded, therefore the 
valuation of shares of private companies is really important and challenging.
FACTORS AFFECTING THE VALUATION OF SHARES
The factors that affect the value of shares of a company are similar to those that affect the 
value of goodwill of the company. In fact, valuation of goodwill and valuation of shares are 
inter-related. The value of a share is greatly affected by the economic, political and social
factors. Let us discuss these factors:
1. Dividend declared by the company in the last years.
2. Demand and supply of the shares of the company.
3. Nature of the business.
4. Future prospectus of the company.
5. Rate of return in the same type of business.
6. Future prospectus of the company.
7. Limitation of competition.
8. Limitation of government control over the company.
9. Financial Ratios.
10. Political conditions such as fear of nationalization.
11. Position of peace and security in the country.
adopting sound and the reasonable basis. . . The e pr rovisions are made by the various tax laws for 
the valuation of shares and the ex xac act t pr p oc c cedur ur re e to t be f f fol ollo lo owe wed d ha as s s al al a so so o b bee ee een laid o o out ut u . 
Va alu lu luation of of o sha are re es is the he he p process s of k know ow owing g th he v valu ue e of f a a a co omp pany y’s s s shar res. . Sha hare 
valu u ua atio o on n n is d don ne based d on o o q q qu ua u nti itativ ve te e echn niqu ues. Va a alue o of o sh hare e w will va ary dep epen n nding g g on the e 
m m marke et de eman and d an an nd d supply y. . Th h he e s share e y pr r rice of of t th he h lis ste te ted d d co o comp panie ies s w whic ch h h a ar a e trad ad aded ed e p pub ub ublicly 
can be k known eas as sil i i y. B Bu B t sha ares s o of pr rivat at a e companie ie es are no o ot t t publically traded, therefore the 
valuat tio io i n n n of o shares o of pr rivate e e com om ompan ni n es s s is real l lly ly i imp m mpor r rta ta tant nt nt and c c cha ha hall ll llen en en i ging g g.
FACT C C OR R RS S S AF AF FF FECT CT TI ING G G THE E E VALU U UAT AT ATIO IO ION N N OF OF OF SH SH SHAR R RES ES ES
Th T The fact ct ctor ors s th that at a aff ffect the e v value of sha a are r r s of a a a c c com om ompa pa pany y y are re re sim m milar r r t t to o o th th thos os ose th th that at at a a aff ff ffec c ct t t th he e e 
value of of f g goo oodwill l of of o t t th he company. In fact, valuation of goodwill and valuation of shares are 
Page 3


 
INTRODUCTION
In unit 11, we have learnt about the meaning of goodwill, characteristics, nature, need for the 
valuation of goodwill, factors affecting the value of goodwill and finally the methods of 
valuation of goodwill.  In this unit, we shall learn about the concept of valuation of shares, 
need for the valuation of shares, factors affecting the valuation of shares and methods of 
valuation of shares. There are many reasons for the valuation of shares but usually valuation 
of shares of the company is done because of two main reasons.
 
f a
Valuation	of	Shares
 
(i) Where there is no market price of the shares as in the case of proprietary 
companies.
(ii) Where for the special reasons, the market price does not reflect the true or 
intrinsic value of the share.
MEANING OF VALUATION OF SHARES
The problem of valuation of shares does not arise if the shares are quoted on the stock 
exchange as it provides the ready means for ascertaining the value placed on such shares by 
the buyers and sellers. Even sometimes the quotations of the stock exchange does not present 
the true value of the shares, so the valuation of shares has to be done by the expert valuer by 
adopting sound and the reasonable basis. The provisions are made by the various tax laws for 
the valuation of shares and the exact procedure to be followed has also been laid out. 
Valuation of shares is the process of knowing the value of a company’s shares. Share 
valuation is done based on quantitative techniques. Value of share will vary depending on the 
market demand and supply. The share price of the listed companies which are traded publicly 
can be known easily. But shares of private companies are not publically traded, therefore the 
valuation of shares of private companies is really important and challenging.
FACTORS AFFECTING THE VALUATION OF SHARES
The factors that affect the value of shares of a company are similar to those that affect the 
value of goodwill of the company. In fact, valuation of goodwill and valuation of shares are 
inter-related. The value of a share is greatly affected by the economic, political and social
factors. Let us discuss these factors:
1. Dividend declared by the company in the last years.
2. Demand and supply of the shares of the company.
3. Nature of the business.
4. Future prospectus of the company.
5. Rate of return in the same type of business.
6. Future prospectus of the company.
7. Limitation of competition.
8. Limitation of government control over the company.
9. Financial Ratios.
10. Political conditions such as fear of nationalization.
11. Position of peace and security in the country.
adopting sound and the reasonable basis. . . The e pr rovisions are made by the various tax laws for 
the valuation of shares and the ex xac act t pr p oc c cedur ur re e to t be f f fol ollo lo owe wed d ha as s s al al a so so o b bee ee een laid o o out ut u . 
Va alu lu luation of of o sha are re es is the he he p process s of k know ow owing g th he v valu ue e of f a a a co omp pany y’s s s shar res. . Sha hare 
valu u ua atio o on n n is d don ne based d on o o q q qu ua u nti itativ ve te e echn niqu ues. Va a alue o of o sh hare e w will va ary dep epen n nding g g on the e 
m m marke et de eman and d an an nd d supply y. . Th h he e s share e y pr r rice of of t th he h lis ste te ted d d co o comp panie ies s w whic ch h h a ar a e trad ad aded ed e p pub ub ublicly 
can be k known eas as sil i i y. B Bu B t sha ares s o of pr rivat at a e companie ie es are no o ot t t publically traded, therefore the 
valuat tio io i n n n of o shares o of pr rivate e e com om ompan ni n es s s is real l lly ly i imp m mpor r rta ta tant nt nt and c c cha ha hall ll llen en en i ging g g.
FACT C C OR R RS S S AF AF FF FECT CT TI ING G G THE E E VALU U UAT AT ATIO IO ION N N OF OF OF SH SH SHAR R RES ES ES
Th T The fact ct ctor ors s th that at a aff ffect the e v value of sha a are r r s of a a a c c com om ompa pa pany y y are re re sim m milar r r t t to o o th th thos os ose th th that at at a a aff ff ffec c ct t t th he e e 
value of of f g goo oodwill l of of o t t th he company. In fact, valuation of goodwill and valuation of shares are 
 
12. Accumulated reserves of the company.
13. Prospectus of bonus or right issue.
14. Capital structure of the company.
15. Number of shareholders.
16. Management of the company.
17. Net tangible assets of the company.
NEED FOR THE VALUATION OF SHARES
In most cases, shares are quoted on the stock exchange. For ordinary transactions in shares or 
debentures or Government securities, the price prevailing on the stock exchange may be 
taken as the proper value. The stock exchange price does not hold good for very large lots. 
All the shares are not quoted on the stock exchange. Shares of private companies in any case 
will not be quoted. Shares of such a company have to change hands and therefore, the value 
of such shares will have to be ascertained.
The necessity for valuation of a share arises in the following circumstances:
(1) For amalgamation and reconstructions: 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.
(2) At the time of dissolution: Where the shares are held jointly by the partners and the 
dissolution of the firm takes place, it becomes necessary to value the shares for proper 
distribution of the partnership property among the partners.
(3) Transfer of shares: Where a portion of the shares is to be given by a member of the 
proprietary company to another member as the member cannot sell it in the open 
market, it becomes necessary to certify the fair prices of the shares by the auditor or 
an accountant.
(4) At the time of taking loan: When the loan is taken on the security of the shares it 
becomes necessary to value the share on the basis of which loan is to be taken.
(5) At the time of conversion: When the preference shares or debentures are to be 
converted into equity shares it becomes necessary to value the equity shares for the 
purpose of calculation of the number of equity shares to be issued in place of 
preference shares or debentures.
(6) Shares of private companies: Shares of private companies are not quoted on the 
stock exchange. If shares of such companies are to be sold, the value of such shares 
has to be ascertained.
(7) At the time of appraisal of shares: When the shares of the company are not quoted 
on the stock exchange and shareholders require the appraisal of their shares, at such 
times the valuation of shares is required.
All the shares are not quoted on the stock exchange. Shares of private companies in any case 
will not be quoted. Shares of such a comp mp mpany y ha ave to change hands and therefore, the value 
of such sh har ares es w wil ill l have to be asc cer erta tain i ed d d.
Th Th The ne ne nece cess ss ssit ity fo or valu l luat a a ion n n of a share e aris i i es i in th he foll lowin ng c circu ums stanc ces:
(1) ) Fo or amalgamation on on a a and d rec con n nstru uctio ons: : Wher er ere c com mpa anies am malga ga gamate o o or r are e e
sim mi m l larly y reco o ons n tructe ted, it may y be e e necessary y to ar ar a ri ri iv ve v a at the value of the shares held by 
th th he e e mem mber r rs of f f the co ompa pany b being n n absorbed d or or t tak ake en over.
(2 2 2) ) ) At t t the time of d disso oluti ti tio on: W Wh W er e e e the sh sh hares es es a a are re re h hel el ld jo o oin in intl tl tly y y by by by t the he he par ar artn tn tner er ers s s a and th th he e
diss solution n n o of th he h f fir ir irm ta ta tak kes p plac c ce, it beco o ome e es ne ne nece ce cess ss ssar a a y to to to val l lue ue ue t t the he he s s sha ha hare e es for r r pr pr prop op oper er er 
distribu b tion o o of f f th h he e e pa a art rt rtn ne n rshi hi h p prop o o erty among the partners.
(3 (3) Tr Tr T an ansf sfer er o o of f f shar ar ares es es: Wh h he ere a po o ortion o of the e sha ha are re res is s s to o o be be be g giv iv ven en en by y a a a me m m mb mb mber er er o o of f f th h he 
pr pr prop opri riet etar ary y y co co om mp m any y y t to another r r membe be ber r r as as as the he he m m mem e embe e er cann nn not ot ot s se ell it it t i i in n n th th the e e o o open n n 
market, it becom m me es necessary to certify the fair prices of the shares by the auditor or 
an accountant
Page 4


 
INTRODUCTION
In unit 11, we have learnt about the meaning of goodwill, characteristics, nature, need for the 
valuation of goodwill, factors affecting the value of goodwill and finally the methods of 
valuation of goodwill.  In this unit, we shall learn about the concept of valuation of shares, 
need for the valuation of shares, factors affecting the valuation of shares and methods of 
valuation of shares. There are many reasons for the valuation of shares but usually valuation 
of shares of the company is done because of two main reasons.
 
f a
Valuation	of	Shares
 
(i) Where there is no market price of the shares as in the case of proprietary 
companies.
(ii) Where for the special reasons, the market price does not reflect the true or 
intrinsic value of the share.
MEANING OF VALUATION OF SHARES
The problem of valuation of shares does not arise if the shares are quoted on the stock 
exchange as it provides the ready means for ascertaining the value placed on such shares by 
the buyers and sellers. Even sometimes the quotations of the stock exchange does not present 
the true value of the shares, so the valuation of shares has to be done by the expert valuer by 
adopting sound and the reasonable basis. The provisions are made by the various tax laws for 
the valuation of shares and the exact procedure to be followed has also been laid out. 
Valuation of shares is the process of knowing the value of a company’s shares. Share 
valuation is done based on quantitative techniques. Value of share will vary depending on the 
market demand and supply. The share price of the listed companies which are traded publicly 
can be known easily. But shares of private companies are not publically traded, therefore the 
valuation of shares of private companies is really important and challenging.
FACTORS AFFECTING THE VALUATION OF SHARES
The factors that affect the value of shares of a company are similar to those that affect the 
value of goodwill of the company. In fact, valuation of goodwill and valuation of shares are 
inter-related. The value of a share is greatly affected by the economic, political and social
factors. Let us discuss these factors:
1. Dividend declared by the company in the last years.
2. Demand and supply of the shares of the company.
3. Nature of the business.
4. Future prospectus of the company.
5. Rate of return in the same type of business.
6. Future prospectus of the company.
7. Limitation of competition.
8. Limitation of government control over the company.
9. Financial Ratios.
10. Political conditions such as fear of nationalization.
11. Position of peace and security in the country.
adopting sound and the reasonable basis. . . The e pr rovisions are made by the various tax laws for 
the valuation of shares and the ex xac act t pr p oc c cedur ur re e to t be f f fol ollo lo owe wed d ha as s s al al a so so o b bee ee een laid o o out ut u . 
Va alu lu luation of of o sha are re es is the he he p process s of k know ow owing g th he v valu ue e of f a a a co omp pany y’s s s shar res. . Sha hare 
valu u ua atio o on n n is d don ne based d on o o q q qu ua u nti itativ ve te e echn niqu ues. Va a alue o of o sh hare e w will va ary dep epen n nding g g on the e 
m m marke et de eman and d an an nd d supply y. . Th h he e s share e y pr r rice of of t th he h lis ste te ted d d co o comp panie ies s w whic ch h h a ar a e trad ad aded ed e p pub ub ublicly 
can be k known eas as sil i i y. B Bu B t sha ares s o of pr rivat at a e companie ie es are no o ot t t publically traded, therefore the 
valuat tio io i n n n of o shares o of pr rivate e e com om ompan ni n es s s is real l lly ly i imp m mpor r rta ta tant nt nt and c c cha ha hall ll llen en en i ging g g.
FACT C C OR R RS S S AF AF FF FECT CT TI ING G G THE E E VALU U UAT AT ATIO IO ION N N OF OF OF SH SH SHAR R RES ES ES
Th T The fact ct ctor ors s th that at a aff ffect the e v value of sha a are r r s of a a a c c com om ompa pa pany y y are re re sim m milar r r t t to o o th th thos os ose th th that at at a a aff ff ffec c ct t t th he e e 
value of of f g goo oodwill l of of o t t th he company. In fact, valuation of goodwill and valuation of shares are 
 
12. Accumulated reserves of the company.
13. Prospectus of bonus or right issue.
14. Capital structure of the company.
15. Number of shareholders.
16. Management of the company.
17. Net tangible assets of the company.
NEED FOR THE VALUATION OF SHARES
In most cases, shares are quoted on the stock exchange. For ordinary transactions in shares or 
debentures or Government securities, the price prevailing on the stock exchange may be 
taken as the proper value. The stock exchange price does not hold good for very large lots. 
All the shares are not quoted on the stock exchange. Shares of private companies in any case 
will not be quoted. Shares of such a company have to change hands and therefore, the value 
of such shares will have to be ascertained.
The necessity for valuation of a share arises in the following circumstances:
(1) For amalgamation and reconstructions: 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.
(2) At the time of dissolution: Where the shares are held jointly by the partners and the 
dissolution of the firm takes place, it becomes necessary to value the shares for proper 
distribution of the partnership property among the partners.
(3) Transfer of shares: Where a portion of the shares is to be given by a member of the 
proprietary company to another member as the member cannot sell it in the open 
market, it becomes necessary to certify the fair prices of the shares by the auditor or 
an accountant.
(4) At the time of taking loan: When the loan is taken on the security of the shares it 
becomes necessary to value the share on the basis of which loan is to be taken.
(5) At the time of conversion: When the preference shares or debentures are to be 
converted into equity shares it becomes necessary to value the equity shares for the 
purpose of calculation of the number of equity shares to be issued in place of 
preference shares or debentures.
(6) Shares of private companies: Shares of private companies are not quoted on the 
stock exchange. If shares of such companies are to be sold, the value of such shares 
has to be ascertained.
(7) At the time of appraisal of shares: When the shares of the company are not quoted 
on the stock exchange and shareholders require the appraisal of their shares, at such 
times the valuation of shares is required.
All the shares are not quoted on the stock exchange. Shares of private companies in any case 
will not be quoted. Shares of such a comp mp mpany y ha ave to change hands and therefore, the value 
of such sh har ares es w wil ill l have to be asc cer erta tain i ed d d.
Th Th The ne ne nece cess ss ssit ity fo or valu l luat a a ion n n of a share e aris i i es i in th he foll lowin ng c circu ums stanc ces:
(1) ) Fo or amalgamation on on a a and d rec con n nstru uctio ons: : Wher er ere c com mpa anies am malga ga gamate o o or r are e e
sim mi m l larly y reco o ons n tructe ted, it may y be e e necessary y to ar ar a ri ri iv ve v a at the value of the shares held by 
th th he e e mem mber r rs of f f the co ompa pany b being n n absorbed d or or t tak ake en over.
(2 2 2) ) ) At t t the time of d disso oluti ti tio on: W Wh W er e e e the sh sh hares es es a a are re re h hel el ld jo o oin in intl tl tly y y by by by t the he he par ar artn tn tner er ers s s a and th th he e
diss solution n n o of th he h f fir ir irm ta ta tak kes p plac c ce, it beco o ome e es ne ne nece ce cess ss ssar a a y to to to val l lue ue ue t t the he he s s sha ha hare e es for r r pr pr prop op oper er er 
distribu b tion o o of f f th h he e e pa a art rt rtn ne n rshi hi h p prop o o erty among the partners.
(3 (3) Tr Tr T an ansf sfer er o o of f f shar ar ares es es: Wh h he ere a po o ortion o of the e sha ha are re res is s s to o o be be be g giv iv ven en en by y a a a me m m mb mb mber er er o o of f f th h he 
pr pr prop opri riet etar ary y y co co om mp m any y y t to another r r membe be ber r r as as as the he he m m mem e embe e er cann nn not ot ot s se ell it it t i i in n n th th the e e o o open n n 
market, it becom m me es necessary to certify the fair prices of the shares by the auditor or 
an accountant
 
(8) For declaring the Net Assets Value: The valuation of shares is made by such 
companies to find the correct value of his assets for declaring the net asset value.
(9) For determination of gift and wealth tax: When the shares are received as a gift, it 
is necessary to determine the value of shares for the purpose of assessing the gift duty 
and also for determination of the wealth tax by the taxation authorities. 
METHODS OF VALUATION OF SHARES
The different methods of valuation of shares are classified as under:
A. Net Assets (Intrinsic Value or Breakup Value) Method.
B. Dividend Yield Method.
C. Earning Capacity Method.
D. Fair Value Method
(A) Net Assets Method
This method is concerned with the assets backing per share and may be either on the view 
that the company is going concern or on the fact that the company is being liquidated. This 
method is also called net intrinsic value method or breakup value method or asset backing 
method or asset valuation method. In order to value the share under this method it is 
necessary to estimate the net tangible assets. Non-trading assets are also included in the assets 
and the assets are taken at the market value.
First Method
Calculation of Net Assets
Assets at Market Value, if any:
      Rs.
Fixed Assets ………
Investments ………
Current Assets ………
Less: Outside Liabilities ……
Less: Preference Share Capital …… ………
 
ME ETH THOD O S OF VALUA ATI TION O OF SH SHARES ES ES
Th h he e di i if ff f er ren en e t t methods of f f v v valua uatio on of f sh ha a ares are cla assif f fie ied d as u und der:
A. N Net As A se ets ts ts (Intrin in nsic c c V Value or r r Breakup Va Va V lu lu ue) ) ) M M Met thod.
B. Divide dend n n Y Y Yie i ld M Metho hod.
C. Earning C Ca C pa acity y y Met ethod d. d
D D. Fair Val lu ue u M Metho hod
(A (A (A) Ne Ne N t t As s sse s s ts M M Met etho ho od d
Th h his is i m m met et e hod is conce ce ern rned ed ed with h h t the assets s s backing ng ng p p pe e er sha ha hare re re a a an nd m m may ay ay b be e e ei eith th t er er r o o on n n th h he e e vi vi view ew ew 
th th that the c c com om mpa pany ny i is s going g g co co c ncern or on n n the fact t t t t tha ha hat th th the co co comp mp mpany ny y is be be bein in ing g g li li liq q quid id ida a ated ed ed. Th Th Thi i is 
meth hod od i is s al also s c cal alle led d d n net intrinsic value method or breakup value method or asset backing 
Page 5


 
INTRODUCTION
In unit 11, we have learnt about the meaning of goodwill, characteristics, nature, need for the 
valuation of goodwill, factors affecting the value of goodwill and finally the methods of 
valuation of goodwill.  In this unit, we shall learn about the concept of valuation of shares, 
need for the valuation of shares, factors affecting the valuation of shares and methods of 
valuation of shares. There are many reasons for the valuation of shares but usually valuation 
of shares of the company is done because of two main reasons.
 
f a
Valuation	of	Shares
 
(i) Where there is no market price of the shares as in the case of proprietary 
companies.
(ii) Where for the special reasons, the market price does not reflect the true or 
intrinsic value of the share.
MEANING OF VALUATION OF SHARES
The problem of valuation of shares does not arise if the shares are quoted on the stock 
exchange as it provides the ready means for ascertaining the value placed on such shares by 
the buyers and sellers. Even sometimes the quotations of the stock exchange does not present 
the true value of the shares, so the valuation of shares has to be done by the expert valuer by 
adopting sound and the reasonable basis. The provisions are made by the various tax laws for 
the valuation of shares and the exact procedure to be followed has also been laid out. 
Valuation of shares is the process of knowing the value of a company’s shares. Share 
valuation is done based on quantitative techniques. Value of share will vary depending on the 
market demand and supply. The share price of the listed companies which are traded publicly 
can be known easily. But shares of private companies are not publically traded, therefore the 
valuation of shares of private companies is really important and challenging.
FACTORS AFFECTING THE VALUATION OF SHARES
The factors that affect the value of shares of a company are similar to those that affect the 
value of goodwill of the company. In fact, valuation of goodwill and valuation of shares are 
inter-related. The value of a share is greatly affected by the economic, political and social
factors. Let us discuss these factors:
1. Dividend declared by the company in the last years.
2. Demand and supply of the shares of the company.
3. Nature of the business.
4. Future prospectus of the company.
5. Rate of return in the same type of business.
6. Future prospectus of the company.
7. Limitation of competition.
8. Limitation of government control over the company.
9. Financial Ratios.
10. Political conditions such as fear of nationalization.
11. Position of peace and security in the country.
adopting sound and the reasonable basis. . . The e pr rovisions are made by the various tax laws for 
the valuation of shares and the ex xac act t pr p oc c cedur ur re e to t be f f fol ollo lo owe wed d ha as s s al al a so so o b bee ee een laid o o out ut u . 
Va alu lu luation of of o sha are re es is the he he p process s of k know ow owing g th he v valu ue e of f a a a co omp pany y’s s s shar res. . Sha hare 
valu u ua atio o on n n is d don ne based d on o o q q qu ua u nti itativ ve te e echn niqu ues. Va a alue o of o sh hare e w will va ary dep epen n nding g g on the e 
m m marke et de eman and d an an nd d supply y. . Th h he e s share e y pr r rice of of t th he h lis ste te ted d d co o comp panie ies s w whic ch h h a ar a e trad ad aded ed e p pub ub ublicly 
can be k known eas as sil i i y. B Bu B t sha ares s o of pr rivat at a e companie ie es are no o ot t t publically traded, therefore the 
valuat tio io i n n n of o shares o of pr rivate e e com om ompan ni n es s s is real l lly ly i imp m mpor r rta ta tant nt nt and c c cha ha hall ll llen en en i ging g g.
FACT C C OR R RS S S AF AF FF FECT CT TI ING G G THE E E VALU U UAT AT ATIO IO ION N N OF OF OF SH SH SHAR R RES ES ES
Th T The fact ct ctor ors s th that at a aff ffect the e v value of sha a are r r s of a a a c c com om ompa pa pany y y are re re sim m milar r r t t to o o th th thos os ose th th that at at a a aff ff ffec c ct t t th he e e 
value of of f g goo oodwill l of of o t t th he company. In fact, valuation of goodwill and valuation of shares are 
 
12. Accumulated reserves of the company.
13. Prospectus of bonus or right issue.
14. Capital structure of the company.
15. Number of shareholders.
16. Management of the company.
17. Net tangible assets of the company.
NEED FOR THE VALUATION OF SHARES
In most cases, shares are quoted on the stock exchange. For ordinary transactions in shares or 
debentures or Government securities, the price prevailing on the stock exchange may be 
taken as the proper value. The stock exchange price does not hold good for very large lots. 
All the shares are not quoted on the stock exchange. Shares of private companies in any case 
will not be quoted. Shares of such a company have to change hands and therefore, the value 
of such shares will have to be ascertained.
The necessity for valuation of a share arises in the following circumstances:
(1) For amalgamation and reconstructions: 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.
(2) At the time of dissolution: Where the shares are held jointly by the partners and the 
dissolution of the firm takes place, it becomes necessary to value the shares for proper 
distribution of the partnership property among the partners.
(3) Transfer of shares: Where a portion of the shares is to be given by a member of the 
proprietary company to another member as the member cannot sell it in the open 
market, it becomes necessary to certify the fair prices of the shares by the auditor or 
an accountant.
(4) At the time of taking loan: When the loan is taken on the security of the shares it 
becomes necessary to value the share on the basis of which loan is to be taken.
(5) At the time of conversion: When the preference shares or debentures are to be 
converted into equity shares it becomes necessary to value the equity shares for the 
purpose of calculation of the number of equity shares to be issued in place of 
preference shares or debentures.
(6) Shares of private companies: Shares of private companies are not quoted on the 
stock exchange. If shares of such companies are to be sold, the value of such shares 
has to be ascertained.
(7) At the time of appraisal of shares: When the shares of the company are not quoted 
on the stock exchange and shareholders require the appraisal of their shares, at such 
times the valuation of shares is required.
All the shares are not quoted on the stock exchange. Shares of private companies in any case 
will not be quoted. Shares of such a comp mp mpany y ha ave to change hands and therefore, the value 
of such sh har ares es w wil ill l have to be asc cer erta tain i ed d d.
Th Th The ne ne nece cess ss ssit ity fo or valu l luat a a ion n n of a share e aris i i es i in th he foll lowin ng c circu ums stanc ces:
(1) ) Fo or amalgamation on on a a and d rec con n nstru uctio ons: : Wher er ere c com mpa anies am malga ga gamate o o or r are e e
sim mi m l larly y reco o ons n tructe ted, it may y be e e necessary y to ar ar a ri ri iv ve v a at the value of the shares held by 
th th he e e mem mber r rs of f f the co ompa pany b being n n absorbed d or or t tak ake en over.
(2 2 2) ) ) At t t the time of d disso oluti ti tio on: W Wh W er e e e the sh sh hares es es a a are re re h hel el ld jo o oin in intl tl tly y y by by by t the he he par ar artn tn tner er ers s s a and th th he e
diss solution n n o of th he h f fir ir irm ta ta tak kes p plac c ce, it beco o ome e es ne ne nece ce cess ss ssar a a y to to to val l lue ue ue t t the he he s s sha ha hare e es for r r pr pr prop op oper er er 
distribu b tion o o of f f th h he e e pa a art rt rtn ne n rshi hi h p prop o o erty among the partners.
(3 (3) Tr Tr T an ansf sfer er o o of f f shar ar ares es es: Wh h he ere a po o ortion o of the e sha ha are re res is s s to o o be be be g giv iv ven en en by y a a a me m m mb mb mber er er o o of f f th h he 
pr pr prop opri riet etar ary y y co co om mp m any y y t to another r r membe be ber r r as as as the he he m m mem e embe e er cann nn not ot ot s se ell it it t i i in n n th th the e e o o open n n 
market, it becom m me es necessary to certify the fair prices of the shares by the auditor or 
an accountant
 
(8) For declaring the Net Assets Value: The valuation of shares is made by such 
companies to find the correct value of his assets for declaring the net asset value.
(9) For determination of gift and wealth tax: When the shares are received as a gift, it 
is necessary to determine the value of shares for the purpose of assessing the gift duty 
and also for determination of the wealth tax by the taxation authorities. 
METHODS OF VALUATION OF SHARES
The different methods of valuation of shares are classified as under:
A. Net Assets (Intrinsic Value or Breakup Value) Method.
B. Dividend Yield Method.
C. Earning Capacity Method.
D. Fair Value Method
(A) Net Assets Method
This method is concerned with the assets backing per share and may be either on the view 
that the company is going concern or on the fact that the company is being liquidated. This 
method is also called net intrinsic value method or breakup value method or asset backing 
method or asset valuation method. In order to value the share under this method it is 
necessary to estimate the net tangible assets. Non-trading assets are also included in the assets 
and the assets are taken at the market value.
First Method
Calculation of Net Assets
Assets at Market Value, if any:
      Rs.
Fixed Assets ………
Investments ………
Current Assets ………
Less: Outside Liabilities ……
Less: Preference Share Capital …… ………
 
ME ETH THOD O S OF VALUA ATI TION O OF SH SHARES ES ES
Th h he e di i if ff f er ren en e t t methods of f f v v valua uatio on of f sh ha a ares are cla assif f fie ied d as u und der:
A. N Net As A se ets ts ts (Intrin in nsic c c V Value or r r Breakup Va Va V lu lu ue) ) ) M M Met thod.
B. Divide dend n n Y Y Yie i ld M Metho hod.
C. Earning C Ca C pa acity y y Met ethod d. d
D D. Fair Val lu ue u M Metho hod
(A (A (A) Ne Ne N t t As s sse s s ts M M Met etho ho od d
Th h his is i m m met et e hod is conce ce ern rned ed ed with h h t the assets s s backing ng ng p p pe e er sha ha hare re re a a an nd m m may ay ay b be e e ei eith th t er er r o o on n n th h he e e vi vi view ew ew 
th th that the c c com om mpa pany ny i is s going g g co co c ncern or on n n the fact t t t t tha ha hat th th the co co comp mp mpany ny y is be be bein in ing g g li li liq q quid id ida a ated ed ed. Th Th Thi i is 
meth hod od i is s al also s c cal alle led d d n net intrinsic value method or breakup value method or asset backing 
 
Second Method
Net Assets = Equity Share Capital + Reserves and Surplus + Accumulated Profits + Profit on 
Revaluation of Assets – Accumulated Losses – Preliminary Expenses
Value of Share = Value of Net Assets/Number of Equity Shares
Illustration 12.1
The following is the summarized Balance Sheet of X Ltd.
Equity and Liabilities Rs.
Share Capital
25,000 Shares of Rs. 20 each 5,00,000
Reserves 1,80,000
Profit and Loss A/c 1,61,000
12% Debentures 4,00,000
Creditors 44,000
Provision for Taxation 50,000
Employees Provident Fund 1,05,000
Total 14,40,000
Assets Rs.
Goodwill 2,10,000
Plant and Machinery 3,00,000
Furniture 50,000
Investment at Cost
(Market value Rs. 4,40,000) 5,00,000
Stock 1,80,000
Debtors 1,20,000
Bank Balance 50,000
Preliminary Expenses 30,000
Total 14,40,000
Goodwill is revalued at Rs. 2, 50,000, while Plant and Machinery is expected to realize Rs. 2, 
85,000. Debtors are subjected to the Provision for bad debts @7%. Calculate the value of 
share on the Net Assets basis. 
Solution
Step 1: Calculation of Net Assets
Net Assets = Realizable Value of Assets – Outside Liabilities 
        Rs.
Goodwill = 2, 50,000
Plant and Machinery = 2, 85,000
Furniture =   50,000
Investments = 4, 40,000
Stock = 1, 80,000
Debtors (1, 20,000 – 7% of 1, 20,000) = 1, 11,600
Creditors 44,000
Provision for Taxation 50,000
Employ oy yee ees s Pr Prov ovid iden en e t t Fund 1,05 05 05,00 00
To o ota ta t l 14 4,4 , 0, ,00 00
A As A se e et ts t Rs s.
Go Go Goodw will l 2,10 10 0,000 0 0
P P Plant an a d d Ma Mach hin i ery y y 3,00,000
Furnitur re e e 50,000
Invest tme me m nt nt n at Cost
(M (M ( ark ket va alue Rs. 4 4, 4 40,0 ,000 0) ) ) 5, ,00,0 0 000 00 00
St to oc o k 1,80,000
D De D btor or ors s 1, 1, 1,20 0 0,0 ,0 ,000 00 00
Ba Ba Bank nk B B Balance 50 0 0, , ,00 00
Pr P P elimin in inar ary y Ex Expe pens nses es 30 0 0,000 00 0
Tota al l l 14,40,000