MCom I Semester Corporate Accounting Valuation Shares study Material Notes ( Part 2 )
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MCom I Semester Corporate Accounting Valuation Shares study Material Notes ( Part 2 ) : Basis of Capitalisation of Profit Suitability o Earnings Basis Fair Value Method Of rights Balance Sheet of X Company Discussion Questions ( This Topic Wise note is Most Important For MCom )
BCom 2nd Year Income Tax Planning of Individual Study Material Notes in Hindi
Illustration 18. A company has 20,000 Equity shares of Rs. 10 each, Rs. 8 paid and 2,00.000 6% Preference shares of Rs. 5 each fully paid. The company transfers 10% of its profit to general reserve and Rs. 9,000 to Sinking Fund for the redemption of its debentures. Expected profit (based on last year’s performance) before tax is Rs. 2,60,000 and rate of income tax is 50%. Find out the value of each equity share, taking a normal rate of return at 15%.
(ii) Value Per Share Capitalised Value of Profits
Number of Shares
Note: If the value of preference shares is also to be ascertained then first find out the total amount of dividend payable to these shareholders. Thereafter find out the capitalised value of the amount of this dividend and then divide this capitalised value by the number of preference shares to obtain the value per preference share. Suitability of Earnings Basis
The earnings basis of valuation of shares is appropriate when (i) the company is a going concern and there are no plans of its winding up in near future, (ii) the information regarding the future profitability of the company is readily available, (iii) normal rate of return can be easily estimated and (iv) the company is profitable and there is no continuous loss in the past.
Merits:
(i) Usually the investors are influenced by the earnings of the company.
(ii) Risk factor is taken into consideration while ascertaining the normal rate of return which plays an important role in any investment decision.
(iii) This method is free from the complex calculations of net assets.
Demerits:
(i) In practice, it is very difficult to predict the future maintainable profits of a business concern on account of risky and uncertain future.
(ii) It is also difficult to precisely determine the normal rate of return taking into consideration the element of risk involved in a particular business.
(iii) If the company has been incurring losses for a number of years, this method will be wholly unsuitable for valuation of shares.
Illustration 20. Find out the value per share from the following information:
Shares study Material
The share capital of a company consists of 20,000 Equity shares of Rs. 10 each, Rs. 8 paid up and 2,000, 8% Preference shares of Rs. 100 each fully paid. The profit for the year is Rs. 50,000 before charging tax. The rate of tax is 50%. Normal rate of return in the case of Preference shares is 5% and in the case of Equity shares, normal rate of return is 8%. General practice is to transfer to General Reserve @ 20% of the profits.
Discussion Questions
Long Answer Questions
1 What are the various methods of valuation of shares ? Describe and illustrate the Yield Valuation Method of valuing shares. When is this method more suitable ?
2. What are the various methods of valuation of shares ? Describe and illustrate the net assets method of valuing the shares.
3. What do you understand by the valuation of shares ? How would you proceed to determine the value of shares of a company for the purpose of its amalgamation ?
4. When does it become necessary to determine the value of shares ? What points should be taken into account while determining the value of shares ?
5. Why Valuation of Shares is needed? What procedure is followed in the valuation of shares while using net assets method ?
6. What do you mean by fair value of shares? How will you determine the fair value of shares ?
7. What do you mean by intrinsic value and market value of shares and how are these determined ?
8. Write short notes on the following:
(a) Face Value and Book Value of Shares,
(b) Normal Rate of Return,
(c) Capital Employed,
(d) Valuation of Bonus Share,
(e) Valuation of Right, and
(e) Valuation of shares for the purpose of Estate Duty.
9. Describe the methods of valuation of shares and which method is useful for manufacturing companies.
Short Answer Questions
(i) Name the main methods of valuation of shares.
(ii) Name the different bases of income measurement under yield method.
(iii) How is market value of shares determined ?
Numerical
(i) If the fair value of a company’s share is Rs. 10, paid up value Rs. 5, expected rate of return is 10% (8% less than the actual rate of return on earnings) and the total number of shares is 10,000, what will be the value of net assets of the company?
(Answer : Rs. 1,10,000)
(ii) The profits of a company (whose capital is divided into 25,000 shares of Rs. 10 each) for the last three years are : Rs. 50,000; Rs. 60,000 and Rs. 40,000. The fair investment return is taken at 10% p.a. Find out the value of company’s share.
(Answer: Rs. 20)
(iii) From the following figures calculate the value of Equity Shares adopting earning method of valuation : 2,000 First Equity Shares of Rs. 100 each fully paid up 3,000 Second Equity Shares of Rs. 100 each Rs. 80 paid up 1,000 Third Equity Shares of Rs. 100 each Rs. 60 paid up Company’s Profit before tax is Rs. 1,80,000. Tax Rate is 50%. Normal rate of return is 10% on capital employed.
(Answer: Rs. 180, Rs. 144, Rs. 108)
(iv) From the following information, calculate the value of Equity Share : 4,000 4% Preference share of Rs. 100 each, fully paid 5,000 Equity shares of Rs. 100 each, Rs. 80 per share paid up 4,00,000 Expected Profit per year before tax) 4,00,000 Income Tax Rate-50% Transfer to General Reserve-20% of Profits Normal Rate of earnings-10%
(v) Calculate value of Equity Share :
(Answer : Rs. 168)
Expected profit before tax Rs. 10,00,000
Income-tax Rate 50%
Transfer to General Reserve 20%
Normal Earning Rate 10%
Shares study Material
