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Valuation Of Equity Shares | Valuation Shares | CAnest

Overview

 Valuation of shares is the process of knowing the value of a company’s shares. Share valuation is done based on quantitative techniques and share value will vary depending on the market demand and supply. The share price of the listed companies which are traded publicly can be known easily. But w.r.t private companies whose shares are not publicly traded, valuation of shares is really important and challenging.

When is Valuation of shares required

Listed below are some of the instances where the valuation of shares is important:

  • One of the important reason is when you are about to sell your business and you wanted to know your business value
  • When you approach your bank for a loan based on shares as a security
  • Merger, acquisition, reconstruction, amalgamation etc – valuation of shares is very important
  • When your company shares are to be converted i.e. from preference to equity
  • Valuation is required when implementing an employee stock ownership plan (ESOP)
  • For tax assessments under the wealth tax or gift tax acts
  • In case of litigation, where share valuation is legally required
  • Shares held by an Investment company
  • Compensating the shareholders, the company is nationalized

Sometimes, even publicly traded shares have to be valued because the market quotation may not show the true picture or large blocks of shares are under transfer etc.

How to choose the share valuation method

There are various reasons for adopting a particular method for share valuation; it generally depends upon the purpose of valuation. Using a combination of methods generally provides a more reliable valuation. Let’s see under each approach what the main reason is:

i. Assets Approach

If a company is a capital-intensive company and invested a large amount in capital assets or if the company has a large volume of capital work in progress then an asset-based approach can be used. This method is also applicable for valuing the shares during amalgamation, absorption or liquidation of companies.

ii. Income Approach

This approach has two different methods namely Discounted Cash Flow (DCF) or Price Earning Capacity (PEC) method. DCF method uses the projection of future cash flows to determine the fair value and if this data is reasonably available, DCF method can be used. PEC method uses historical earnings and if an entity is not in the business for a long time and just started its operations, then this method cannot be applied.

iii. Market Approach

Under this approach, the market value of the shares is considered for valuation. However, this approach is feasible only for listed companies whose share prices can be obtained in the open market. If there are a set of peer companies that are listed and engaged in a similar business, then such a company’s share public prices can also be used.

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