Valuation of Shares

Introduction

• Topic focused on in the video: Valuation of Shares
• Simple and easy chapter in corporate accounts
• Similar to calculating goodwill; involves mathematics rather than preparing accounts
• Aim: Calculate the value of company shares

Importance of Share Valuation

• Required in various scenarios:
  • Merger, Acquisition, Reconstruction, Amalgamation
  • Conversion of Preference Shares to Equity Shares
  • Implementation of Employee Stock Ownership Plan (ESOP)
  • Tax Assessment under Wealth Tax or Gift Tax
  • Bank Loans based on Shares as Security
  • Bonus Issue and Rights Issue of Shares

Methods of Share Valuation

• Three main methods covered in B.Com and BBA syllabi:
  1. Net Assets Method
  2. Yield Method
  3. Fair Value Method

1. Net Assets Method

• Asset-based approach
• Calculation focuses on net assets available for equity shareholders
• Formula involves dividing net assets by the number of shares
• Detailed explanation and problem-solving in following video
• Other names: Intrinsic Value Method, Breakup Value Method, Balance Sheet Method, Asset Backing Method

2. Yield Method

• Future earnings-focused approach
• Considers future dividends and earnings
• Market-based valuation method
• Other names: Earning Capacity Method, Earning Capitalization Method, Dividend Yield Method

3. Fair Value Method

• Simple averaging method
• Takes average of values from Net Assets and Yield Method
• Not based on a distinct principle

Exam Tips

• Be prepared for long problems involving all three methods
• Awareness of duplicate names for methods to avoid confusion

Closing Remarks

• Future videos will include detailed problem-solving for each method
• Emphasis on understanding how to calculate net assets and considerations for each method
• Encouragement to watch subsequent videos for in-depth understanding and practice.