Competitive Exams Commerce Study Material: How to calculate the value of Share

How to calculate the value of Share

Value of share means that price of share which can be sold in the market. If a company's shares are not quoted in stock exchange, then there is need to calculate value of share

There are also following situation for valuation of share:

  • Ist Situation: When debentures or pref. Shares are converted into shares at that time it is necessary to calculate value of share.
  • 2nd Situation: When shares are given as a gift, at that time also need to calculate value of share for paying gift tax. Gift tax is calculated on the total value of Shares.
  • 3rd Situation: When loan is given on security of shares at that time calculation the value of shares is done by accountant.

Method of valuation of Share

There are two method of valuation of shares.

Net Asset method

Under this method, value of share is equal to net assets. So, we first calculate net assets

Net assets = total tangible assets total liabilities Including pref. Share capital + Goodwill

Value of Share = Net Assets/No. Of Shares

For example, Suppose total tangible assets are RS. 100000, Goodwill Rs. 10000, pref. Share capital Rs. 20000, Other liabilities = RS. 40000, Equity shares capital is Rs. 60000 of 10000 shares. Calculate the value of shares

Net Asset = 100000 20000 − 40000 + 10000 = 50000

Value of Shares = 50000/10000 = Rs. 5

Earning Capacity Method

Under this method, value of share is equal to the proportion of expected earning and normal earning of paid up value of shares.

Value of Share = Expected earning rate/Normal earning rate X Paid up Value of Shares

  • Expected Earning Rate = Expected profit/total equity share capital X 100
  • Expected profit = Average annual profit taxation reserve pref. Dividend
  • For example, Calculate the value of share with earning capacity method, if company has issued 10000 shares at the rate of 10 each and fully paid up. Suppose average profit is Rs. 20000 and taxation is 2000, reserve is Rs. 500 and pref. Share dividend is Rs. 600.
  • Normal rate of earning is 10 % of total profit before tax.
  • We know, we first calculate expected profit rate
  • Expected profit = 20000 − 2000 − 500 − 600 = 16900
  • Expected profit rate = 16900/100000 X 100 = 16.9 %
  • Value of Share = 16.9/10 X 10 = Rs. 16.90

What is the Holding Company?

Definition of Holding Company: Any company who controls other company is called holding company.

In other words, if any company has any one power from following three powers, then that company will be holding company If any company has 51 % shares of other company, then this company becomes holding company of other. Or If any company has power to appoint board of directors of other company, then this company becomes holding company of other company. Or Main holding company also will the holding company of all subsidiaries'subsidiary companies.

Explanation with Example

Suppose, H is holding company of S because 51 % shares are of H in S. S is also of holding Company of R because S have power to appoint the board of directors of R Company and then H is also holding Company of R.

Main features of Holding Company

  1. Holding Company provides the power to work independently to subsidiary company. Because relationship of holding and subsidiary company is not amalgamation or merge but both company joins for cutting the cost of competition and getting the benefits of monopoly.

  2. Holding company can also deal with subsidiary company and it is also recorded in both books.

  3. Under Company act of India 1956, it is required to attach the copy of final accounts of subsidiary company with the annual report of holding company.