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Valuation Of Shares

Earning Capitalization

Method (ECM)

Dividend Capitalization

Method

Fair Value Method

Fair Value = Intrinsic Value + ECM

2

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Calculation Of Value on Intrinsic Value Basis

Also Known as :

• Intrinsic Value • Net Asset Value• Break up Value• Net Worth Per Share• Book Value Per Share

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Valuation of Intrinsic Value :

Sundry Assets ----------

Less: Sundry Liability ----------

Add: Goodwill ( Revalued) ----------

Add: Non Trade Investment ----------

Less: Preference Share Capital and

Dividend in Arrear ----------

Add: Notional Calls ----------

Net Asset For ESH ======

Divided By No. of Shares ----------

Intrinsic Value ======

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Note: Goodwill will always be calculated for the purpose of Intrinsic Value

Note: Sundry Asset and Liability are after :

Revaluation

Rectification

New Policy etc.

Note: Always Calculate Intrinsic Value on Ex Dividend Basis.

Intrinsic Value = Int. Value + Div Per

Cum Dividend Ex Dividend Share

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1. Earning Yield Method / Earning Capitalization Method / Yield Method

= Earning Rate × Paid Up Share Capital Per Share

NRR

Future Marketable - Non Trade Inv.

Profit Income Net of tax

Earning Rate = x 100

Share Capital

Use : Where large no. of shares is to be valued ( Big Lots)

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2. Dividend Capitalization Method

Dividend Rate x Paid up share cap per share

Normal Rate of return

• Dividend Rate is rate of Dividend Company is expected to pay.

• Normal Dividend Rate is NRR.

• This method is applied for Small Lot of shares.

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3. Fair Value Method

Fair Value = Intrinsic Value + ECM

2

This method is to be used for valuation of shares for controlling Interest.

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How to Calculate Normal Rate of Return

NRR of Industry is taken as Base ---------

Add: Risk Factor ½ % Assumed ---------

( Risk Premium for each risk)

Ke of Companies NRR

Risk Factors:

1. Dividend Track Record

2. Dividend Coverage Ratio

3. Asset Backing Ratio

4. Debt Equity / Capital Gearing Ratio

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Equity Dividend Coverage Ratio =

PAT – Preference Dividend with CDT

Equity Dividend

Preference Dividend Coverage Ratio =

PAT

Preference Dividend

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Asset Backing Ratio =

Intrinsic Value Per Share

Paid up value per Share

Capital Gearing Ration =

Debt + Preference Share Holder

Equity – Losses – Preference Share Holder

Debt Equity =

Debt

Equity

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4. Valuation of Business

It can be on the basis of:1. Shares2. Cash Flows

1. Value as per Share = Number of × Value of

Shares Shares Value per share can be : MP , Intrinsic Value , Fair Value , ECM , DCM

2. Value of Business on Cash Flow Basis =

Cash flow of Business × Discount Factor