Page 292 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 12: Valuation of Shares

z z In India, the Capital Issues (Control) Act, 1947, and the Capital Issues (Exemption) Order, Notes
1969, define the terms and conditions for issuance of securities by the corporate sector.
z z The “Fair Value (FV)” of a company’s shares is to be computed by averaging the values
obtained by the “Net Asset Value (NAV)” method and the “Profit Earning Capacity Value
(PECV)” method. These computations are to be largely based on audited accounts of the
recent past.

z z The market price of the company’s share based on the previous three years’ high-low
would only be kept “in the background” and is to be largely used for fine-tuning the FV.

z z The NAV is nothing but the traditional book value per share computed on the basis of the
latest published annual accounts.

12.7 Keywords

Capitalised Value: Assessment of the value of an asset, based on the total income expected to be
realised over its economic life span.
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.
Dividend: A sum of money paid regularly (typically quarterly) by a company to its shareholders
out of its profits (or reserves).
Earning Yield: Under this method, shares are valued on the basis of expected earning and normal
rate of return.

External Liabilities: External liabilities are those which have to be paid to outsiders (not
shareholders of the company).
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.
Net Value of Assets: Under this method, the net values of assets of the company are divided by
the number of shares to arrive at the value of each share.
Par Value: The nominal value of a bond, share of stock, or a coupon as indicated in writing on the
document or specified by charter.
Quotation Price: A Quotation price is a business offer made by a seller to an interested buyer to
sell certain goods at specific prices and on certain terms and conditions.
Rate of Return: The term “rate of return” refers to the return which a shareholder earns on his
investment.

12.8 Review Questions

1. What factors will you keep in mind while valuing the shares?
2. Explain the circumstances under which valuation of shares is considered necessary.
3. What are the various methods of valuation of shares? Describe and illustrate the yield
valuation method of valuing shares.
4. What is meant by intrinsic value and market value of shares and how are they
determined?
5. Explain the following terms with reference to the valuation of shares:

(a) Fair Value
(b) Value of Right Share

LOVELY PROFESSIONAL UNIVERSITY 287