Page 268 - DCOM205_ACCOUNTING_FOR_COMPANIES_II
P. 268
Unit 12: Valuation of Shares
declared by the company, while majority shareholders or investors holding bulk of shares would Notes
depend upon the total earning capacity of the company. In addition to this factor, there are some
other factors which influence the value of shares. These are given below:
1. Earning capacity of the company affects the value of shares of the company.
2. Dividends declared by the company in the previous years also affect the value of shares, if
dividend rate fluctuates in the previous years has a negative impact on the investors.
3. Rate of return from other companies of the same nature also affects the value of shares in
which the investors take interest.
4. Net tangible assets of the company also attract the investors.
5. Restrictions on the transferability of shares would adversely affect the value of shares.
6. Capital employed of the company in relation to the profits earned would affect the value of
shares.
7. Qualification, experience and capacity of the management of a company would affect the
price of the shares of a company.
8. If some incentives are given by the government in its policy to a particular business, there
will be good chances that the value of its shares may go up.
9. Demand and supply of the shares of a company also affect the value of shares.
10. There would be an impact of the political, economical and social conditions on the value of
a particular company.
11. Nature of competition in the business also affects the value of the shares. If there is
monopoly in the business, value of its shares will be high.
12. Goodwill of the company has its own impact on the value of shares.
Self Assessment
Fill in the blanks:
7. To find the intrinsic value of one equity share, the net assets are divided by ………….
8. Gross assets minus external liabilities are called …………….
9. Market value of the share is based on the rate of ………. or …………..
10. The average of intrinsic value of the share and market value of the share is called
………………….
11. To calculate the intrinsic value of the share only ……….. assets are considered.
12.5 Methods of Valuation of Shares
The shares are valued on three bases: (1) Assets basis (2) Earning basis and (3) Average basis. On
these bases, the following methods are undertaken.
12.5.1 Assets Valuation Method or Intrinsic Value Method
The valuation of shares under this method is an attempt to determine the amount of net assets of
the business behind each share. In other words, to determine the amount of safety of fixed assets
against the investment of a shareholder, this method is used. Under this method, the following
procedure is adopted to determine the value of shares:
LOVELY PROFESSIONAL UNIVERSITY 263
