7 Questions
What must be deducted from the Net Assets to ascertain the value of an Equity Share?
Preference Shareholders' claim
Which method of valuation focuses on investors' interest in income and expected dividends?
Dividend Yield Method
What is the formula for calculating the value of a share using the Dividend Yield Method?
Expected Rate of Dividend X Paid Up Value of Share
In the Earning Capacity Method, what is the basis for calculating the value of shares?
Earnings
What does the Earning Capacity Method assume about the company's operations?
Continued operations
Which method evaluates a company's share based on comparing its expected dividend rate with the industry's normal dividend rate?
Dividend Yield Method
What should be deducted from Net Assets to find the value of an Equity Share, according to the text?
Preference Shareholder claims
Study Notes
Valuation of Shares: Need and Purpose
- When two or more companies amalgamate or one company absorbs another
- During company reconstruction
- When preference shares or debentures are converted into equity shares
- Under a scheme of nationalization when the government takes over a company's shares
- When shares are pledged as security for raising loans
- When one company acquires a majority of another company's shares
- To distribute partnership property among partners when a company is dissolved
- To declare NAV (Net Asset Value) by a Finance or Investment Trust Company
- To determine Gift Tax and Wealth Tax when shares are received as a gift
- To value shares of a private company not listed on the stock exchange
Values of Shares
- Face Value: the value printed on the share certificate
- Book Value: calculated by dividing the book value of the company by the total number of shares
- Intrinsic Value: calculated by dividing the net assets of the company by the total number of shares
- Capitalised Value: calculated by dividing the capitalised value of profit by the total number of shares
- Fair Value: calculated by adding the value of shares by NAV method and yield method
- Cost Value: the price of shares purchased with additional costs such as brokerage and commission
- Market Value: the price at which shares are bought or sold
Methods of Valuation
- Net Assets Value (NAV) Method: calculates the possible value of a share in case of liquidation
- Dividend Yield Method: calculates the value of a share based on expected dividends
- Earning Capacity (Capitalisation) Method: calculates the value of a share based on the company's earnings
- Average (Fair Value) Method: calculates the value of a share by averaging the NAV and yield methods
This quiz covers the need or purpose of the valuation of shares, including scenarios like company amalgamation, reconstruction, conversion of preference shares, and nationalization under a government scheme. It also touches upon the use of shares as security for loans and in cases of company acquisitions.
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