Valuation shares

1. Dividend yield method The calculation is: Price of share =

Ordinary dividend per share / Adjusted dividend yield Unlisted
organisations don’t have distributed dividend yields. We,
therefore, take the dividend yield of a recorded organisation that
is in a similar and then modify it. Keep in mind that a dividend
yield is the yield (restore) that shareholders gain as profit. We
generally modify the dividend yield for the way that an unlisted
standard share is less attractive than a recorded organisation share.
We can likewise alter the dividend yield for different factors e.g.
hazard, size and conceivable transferability confinements in the
Articles of Association. The net impact of the alterations is that
the adjusted dividend yield should be higher than the original
dividend yield of the listed company. 2. Earnings method The
calculation is: Cost of share = Earnings per share (based on FME)
x Adjusted price earnings ratio Unlisted organisations do not
have distributed value income (PE) proportions. Similarly to the
dividend yield strategy, we must modify the PE proportion of a
recorded organisation in a similar industry. Remember that a PE
ratio is the number of times that the share price exceeds the
earnings per share (EPS). The income should also be investigated
to check whether these are viable. 3. Net asset method This is the
easiest calculation as it is derived from the value of the net assets
in the statement of financial position. Net assets = Total assets –
Total liabilities = Total equity and reserves Price of share = Net
assets / Number of ordinary shares in issue 4. Discounted cash
flow method This method requires an estimation of future money
streams. The money streams utilised are those after obligatory
back-instalments, but before dividends are paid. The money
streams are normally assessed for a specific number of years,
after which a terminal multiplier is connected to the last evaluated
year. This relates to money streams which will be acquired in the
future, which cannot be assessed with as much certainty. All
these cash flows are then discounted at a cost of equity. The cost
of equity used is often that of the purchaser of the shares,
calculated using the Capital Asset Pricing Model (CAPM)
formula. CAPM = Risk free rate + Beta (Return on the market –
risk-free rate) Price of a share = Total discounted cash flows /
Number of ordinary shares in issue

valiation of goodwill

The various methods that can be adopted for

valuation of goodwill are follows:

1. Average Profit Method

2. Super Profit Method

3. Capitalization Method

4. Annuity Method.

1. Average Profit Method:

Under this method the value of Goodwill is calculated by
multiplying the Average Future profit by a certain number of
year’s purchase.

Goodwill = Future maintainable profit after tax x No. of years purchase

The first step under this method is the calculation of average profit based on past few

years’ profit. Past profit are adjusted in respect of any abnormal items of profit or loss

which may affect future profit. Average profit may be based on simple average or weighted

average.

If profits are constant, equal weight-age may be given in calculating the average profits i.e.,

simple average may be calculated. However, if the trend shows increasing or decreasing

profit, it is necessary to give more weight-age to the profits of recent years.

Number of year’s purchase:

After calculating future maintainable average profits, the next step is to determine the

number of years’ purchase. The number of years of purchase is determined with reference

to the probability of new business to catch up with an existing business. It will differ from

industry to industry and from firm to firm. Normally the number of years ranges between

3 to 5.

Steps Involved under Average Profits Method:

(i) Calculate past profits before tax.

(ii) Calculate future-maintainable profit before tax after making past adjustments.

(iii) Calculate Average Past adjusted Profits (taking simple average or weighted average as

applicable).

(iv) Multiply Future Maintainable Profits by number of years’ purchase.

Value of Goodwill = Future Maintainable Profits x No. of years’ purchase.