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How to Value Shares& Business?

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Introduction

The valuation of shares and business is resortedwhen the merger and acquisitions proposals are

under consideration.

The readily available mode of valuation is to take

the stock exchange quoted price.Such market price depends on the expectations of

the investors, growth prospects of the company,

present and future competition, the risk class of

industry, yield on comparable securities, marketsentiments, fundamentals of the company etc.

But sometime, the share price may be quoted

lesser due to asymmetric information.

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3

Value of Share

& Company

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4

Asset Based Valuation (intrinsic

value method)

Net assets available to equity shareholders

Number of Equity shares

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5

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Valuation Relative to Industry

Averages

The relative valuation apply a relation ofspecific financial or operational characteristicfrom a similar company or industry to thecompany being valued

The following valuation models are generallyused basing on the industry averages oraverages of a similar company in the sameindustry:

(a) Dividend Yield Method(b) Earnings Yield Method

(c) Return on Capital Employed Method

(d) Price/Earning Method

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Dividend Yield Method

Value per Share =Company's dividend per share

Industry's average dividend per share

or

Company's rate of dividend per share X Nominal value of company's

share

Industry's normal rate of dividend

Value of Business

= Value per equity share X Total number of equity shares

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Ashoka Builders Ltd. has an issued and paidup capital of 5,00,000 shares of Rs. 10 each.

The company declared a dividend of Rs. 12.50

lacs during the last five years and expects to

maintain the same level of dividends in future.The control and ownership of the company is

lying in the few hands of directors and their

family members. The average dividend yield for

listed companies in the same line of business

is 18% Calculate the value 3,000 shares in the

company.

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ABC Ltd. has declared dividend during the pastfive years as follows:

Year 2001 2002 2003 20042005

Rate of dividend (%) 12 14 18 2124

The average rate of return prevailing in the

same industry is 15%.Calculate the value per share of Rs. 10 of ABC

Ltd. based on the dividend yield method.

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Earnings Yield Method

Value of Business=Company's expected future maintainable profits

Industry's normal earnings yield

Kavery Industries Ltd. is expected to generate

future profits of Rs. 54,00,000. What is its value

of business if investments of this type are

expected to give an annual return of 18%.

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Return on Capital Employed

Value of share=Rate of return X nominal value of share

Market expected rate of return

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Price Earning Method