Page 267 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes 12.3 Various Types of Value of Shares

There may be the following types of the value of shares:

1. Par Value or Face Value or Nominal Value: In the Capital Clause of the Memorandum of
Association of a company, amount of capital, number of shares and value of each share is
mentioned. The value of share which is given in this clause is called the par value or face
value or nominal value. This par value of share is shown in the accounts of the company.
If the issue price is above the par value, excess of issue price over par value is called share
premium and if the issue price is lower than the par value, it is called issue at discount.
2. Book Value: Total of share capital, reserve and surplus, including the accumulated profits
is called the capital of the company. To find out the book value of a share, the total capital
of the company is divided by the total number of shares issued.
3. Break up Value or Intrinsic Value: Book value of shares does not represent the transfer
price or selling price, because total capital is computed on the basis of historical basis. Due
to this drawback, break up value of shares is calculated. Here the realisable amount of all
real assets is considered on a particular date. And from the total real assets all external
assets are subtracted. The balance left is known as intrinsic value or break up value of
shares. To find out the break up value of one share, total intrinsic value of shares is divided
by the total number of shares.
4. Market Value: Market value of the share means that value at which transactions take place
in the stock exchange. This price is determined by the stock exchange. This value is affected
due to the demand and supply of shares in the market. This is also known as fair market
value of the share.
5. Cost Price: It is that price which a shareholder has to pay to acquire the share. It includes
market price of the share, brokerage or commission and transfer fees, etc.
6. Capitalised Value: In order to find out the capitalised value of shares, average profits of a
company are capitalised at the normal rate of return. This capitalised value of shares is then
divided by the total number of shares to find out the capitalised value of one share.

7. Fair Value: It is the average value of market value and intrinsic value of the share. In order
to calculate the average value, the total of market value and intrinsic value is divided by
two.

Did u know? Book value of shares does not represent the transfer price or selling price,
because total capital is computed on the basis of historical basis.

Self Assessment

State whether the following statements are true or false:

5. The weighted average of intrinsic value of a share and market value of a share is fair
value.
6. To purchase a few shares, market value should be calculated on the basis of actual rate of
return.

12.4 Factors Affecting the Value of Shares

The basic principle (factor) which is kept in mind at the time of valuation of shares is dividend
yield, which the investors expect to receive from the company as compared to the normal rate
of return. Minority shareholders or small investors would depend upon the rate of dividend

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