Valuation of Shares
In the cases of shares quoted in the recognised Stock Exchanges, the prices quoted in the Stock Exchanges are generally taken as the basis of valuation of those shares. However, the Stock Exchange prices are determined generally on the demand-supply position of the shares and on business cycle. The London Stock Exchange opines that the Stock Exchange may be linked to a scientific recording instrument which registers not its own actions and options but the actions and options of private institutional investors all over the country/world. These actions and options are the result of fear, guesswork, intelligent or otherwise, good or bad investment policy and many other considerations. The quotations what result definitely do not represent valuation of a company by reference to its assets and its earning potential. Therefore, the accountants are called upon to value the shares by following the other methods.
The value of share of a company depends on so many factors such as:
1. Nature of business.
2. Economic policies of the Government.
3. Demand and supply of shares.
4. Rate of dividend paid.
5. Yield of other related shares in the Stock Exchange, etc.
6. Net worth of the company.
7. Earning capacity.
8. Quoted price of the shares in the stock market.
9. Profits made over a number of years.
10. Dividend paid on the shares over a number of years.
11. Prospects of growth, enhanced earning per share, etc.
Need and Purpose of Valuation of Shares
The need for valuation of shares may be felt by any company in the following circumstances:
1. For assessment of Wealth Tax, Estate Duty, Gift Tax, etc.
2. Amalgamations, absorptions, etc.
3. For converting one class of shares to another class.
4. Advancing loans on the security of shares.
5. Compensating the shareholders on acquisition of shares by the Government under a scheme of nationalisation.
6. Acquisition of interest of dissenting shareholder under the reconstruction scheme, etc
Factors Influencing Valuation
The valuation of shares of a company is based, inter alia, on the following factors:
1. Current stock market price of the shares.
2. Profits earned and dividend paid over the years:
3. Availability of reserves and future prospects of the company.
4. Realisable value of the net assets of the company.
5. Current and deferred liabilities for the company.
6. Age and status of plant and machinery of the company.
7. Net worth of the company.
8. Record of efficiency, integrity and honesty of Board of Directors and other managerial personnel of the company.
9. Quality of top and middle management of the company and their professional competence.
10. Record of performance of the company in financial terms.
Methods of Valuation of Shares
Certain methods have come to be recognised for valuation of shares of a company, viz.,
(1) Open market price,
(2) Stock exchange quotation,
(3) Net assets basis,
(4) Earnings per share method,
(5) Yield or return method,
(6) Net worth method,
(7) Break-up value, etc.