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The valuation of shares involves finding out the value of a company’s
shares. The share value of the listed entity whose shares are floating and
traded on the stock market can be evaluated easily. Valuation of Shares varies
depending upon the demand and supply of shares
in the market, and the valuation is done based
on quantitative techniques. However, in the case
of private companies,
whose shares are not publicly traded, the valuation of shares becomes difficult and challenging.
Table of Contents
Share Valuation is required in case of the following incidences:
The selection of a
suitable method for
share valuation generally depends upon the purpose of
such valuation. Combining two or more methods for the valuation of shares
provides a more reliable valuation. Following are the approaches usually
Other than the above,
this approach is applied by a company for the valuation of shares, in case the
company is undergoing amalgamation, merger, or absorption.
Read Also: Methods of Business Valuation in India.
Different methods for valuation
of shares can be used depending upon the purpose, the available data, nature of the company, etc.:
Value per Share = Net Assets – Preference Share Capital
Number of Equity Shares
2. Income-Based Method: This method is used when a very small number of shares are required to be evaluated. The main focus is on what the business will generate in the future. Business value is estimated by dividing the expected earnings by a capitalization rate. The value of shares is calculated based on the profit of the company available for distribution. Gross profit is calculated by deducting reserves and tax from net profit.
Value of Shares = Capitalized Value
Number of Shares
Capitalized Value = Profit available for Dividend
__________________________ x 100
Normal Rate of Return
3. Market-Based Method: Following are the two methods of market-based valuation of shares:
1) Value per Share = Expected rate of earning
______________________ x Paid-up Equity Value
Normal Rate of Return
2) Expected rate of earning = Profit after tax
____________ X 100
Paid-up Equity Value
1) Value per Share = Expected Dividend X Paid-up Equity Value
Normal Rate of Return
2) Expected rate of dividend = Profit available for Dividend
X 100 Paid-up Equity Value
Book Value of Equity per Share
Book Value is different from the
market value in terms that book value uses the historical cost while market
value is a forward-looking mechanism that considers the future earning
potential of a company.
The book value of
securities is compared with that of market value to ascertain whether the price
is overvalued or undervalued. In case the book value of shares is higher than
the market value of shares, the stock price is said to be undervalued.
In the event of
liquidation, when all the assets are sold, and the liabilities are paid,
shareholders get the book value for their holdings. All the assets would be
sold at the market price which is the
prevailing price in the market, and therefore the market price is considered as
a better floor price as compared to book value(that uses the historical cost of
Also, Read: Brief on business valuation methods in India.
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