How Valuate Shares & Intangible Assets

HOW

HOW TO TO VALUATE VALUATE SHARES SHARES &&

INTANGIBLE ASSETS INTANGIBLE ASSETS  by :  by : DR. T.K. JAIN DR. T.K. JAIN AFTERSCHO AFTERSCHOOLOL

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My purpose here is to give a few ideas about strategic My purpose here is to give a few ideas about strategic

management

management for intrapraneurs. for intrapraneurs. Read a Read a lot. lot. Be anBe an intrepreneur, change the society, change the world. Go intrepreneur, change the society, change the world. Go with

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Why do we need to undertake

Why do we need to undertake

valuation of shares ?

valuation of shares ?

1. when we are paying tax (wealth tax / gift tax 1. when we are paying tax (wealth tax / gift tax

/ income tax / other taxes) / income tax / other taxes)

2. mergers and amalgamation of companies 2. mergers and amalgamation of companies

3. issue of shares to employees 3. issue of shares to employees 4. when there is need

4. when there is need for reconstruction of thefor reconstruction of the capital of the

capital of the companycompany 5. to show the value in

What are the methods of valuation

What are the methods of valuation

of shares ?

of shares ?

There are 2 mthods : There are 2 mthods : 1. net assets basis and 1. net assets basis and 2.

What are the methods in Net

What are the methods in Net

Assets Based valuation methods?

Assets Based valuation methods?

We have 3 methods of valuation

We have 3 methods of valuation in Net Assetsin Net Assets  based valuation methods.

 based valuation methods. 1. break up value method 1. break up value method

2. Book value

2. Book value methodmethod 3. Appraisal value method 3. Appraisal value method

When is break up val

When is break up value method

ue method

more useful?

more useful?

When we are undertaking valuation of a

When we are undertaking valuation of a sick sick  company / closed company / a company

company / closed company / a company whichwhich is not likely to remain operational

When is book value method more

When is book value method more

useful?

useful?

For the purpose of taxation, and other similar  For the purpose of taxation, and other similar 

formalities formalities

When is appraisal value method

When is appraisal value method

more useful ?

more useful ?

When we are undertaking valuation for the When we are undertaking valuation for the

 purpose of purchase / sale of

How to undertake valuation in net

How to undertake valuation in net

assets based methods ?

assets based methods ?

Find the value of assets, deduct the value of  Find the value of assets, deduct the value of  liabilities, find net assets. Divide net assets by liabilities, find net assets. Divide net assets by number of shares to get the value of each share. number of shares to get the value of each share.

Example : Ass

Example : Assets = 100, liabiliets = 100, liabilities = 40,ties = 40, number of shares are 5,

number of shares are 5, (100-40)/5 = 12 per share (100-40)/5 = 12 per share

so here the value of share is 12. so here the value of share is 12.

What is the differenc

What is the difference between the

e between the

three methods in Net Assets

three methods in Net Assets

Based methods ?

Based methods ?

Break

Break up value mup value method ±ethod ± here we fhere we find the break ind the break up valueup value of each

of each asset ±asset ± (what v(what value we walue we will get if we sell thiill get if we sell thiss asset)

asset)

Book value method looks at book

Book value method looks at book value (from thevalue (from the accounts

accounts of the of the company), company), appraisal appraisal value value method method lookslooks at value based on appraisal by experts / independent at value based on appraisal by experts / independent

valuers valuers

The value of share will be different in each of these three The value of share will be different in each of these three

methods. methods.

What is earning capacity / yield

What is earning capacity / yield

method ?

method ?

Here the value of share is calculated by either  Here the value of share is calculated by either 

of the following : of the following : 1. dividend 1. dividend 2. earning capacity 2. earning capacity

How to value share using

How to value share using

dividend method ?

dividend method ?

Find the value of share

Find the value of share using the followingusing the following formula :

formula : (Dividend

(Dividend rate / rate / normal normal dividend dividend rate) rate) * * PaidPaid up value of a share

How to value share using earnings

How to value share using earnings

method ?

method ?

We will use the

We will use the following formfollowing formula for ula for  determination of value of share :

determination of value of share : -(earnings

(earnings rate / rate / normal normal earnings rate) earnings rate) * Paid * Paid upup value of a share

How to find normal rate of return

How to find normal rate of return

??

It is a crucial issue. The value of the share is It is a crucial issue. The value of the share is

 based on normal rate of return. If we

 based on normal rate of return. If we areare  prudent, we will be able to fix appropriate  prudent, we will be able to fix appropriate normal rate, thus the valuation will be

normal rate, thus the valuation will be proper.proper.  Normal rate depends on many factors and on  Normal rate depends on many factors and on

the overall expectations of the

Factors affecting normal rate of 

Factors affecting normal rate of 

return?

return?

1. whether it is secured

1. whether it is secured or unsecuredor unsecured 2. investors expectations of risks 2. investors expectations of risks

3. investors' perception of industry trend, future 3. investors' perception of industry trend, future

direction, likely risk  direction, likely risk 

4. returns available in other sectors 4. returns available in other sectors

Example ....

Example ....

 Normal rate of return for

 Normal rate of return for government bondsgovernment bonds will be less than

will be less than corporate bonds, the normalcorporate bonds, the normal rate for corporate bonds will be less than rate for corporate bonds will be less than  preference

 preference shares, shares, which which will alswill also be o be less less inin compariso

comparison n to equity shares.to equity shares.

It all depends on investor's expectations of  It all depends on investor's expectations of 

risks attached to the i

How to value share using fair 

How to value share using fair 

value

value method

method ??

Fair value method is arithematic mean of Net Fair value method is arithematic mean of Net

assets based value and yield based value. assets based value and yield based value.

Thus its formula : Thus its formula :

= (Net assets based value + yield value) / 2 = (Net assets based value + yield value) / 2

How to value inta

How to value intangible assets ?

ngible assets ?

There are three important methods : There are three important methods :

1. cost of the asset 1. cost of the asset

2. future earning potential 2. future earning potential 3. if

3. if acquiracquired in eed in exchanxchange of sge of securitecurities ±ies ± thenthen the value of the securities which have been the value of the securities which have been

exchanged exchanged

What is intangible asset?

What is intangible asset?

 Non

 Non-Mon-Monetary etary assasset ±et ± which which doesdoesn't han't haveve  physical bases, but it can

 physical bases, but it can generate income for generate income for  the enterprise in future.

What are the charact

What are the characteristics of 

eristics of 

intangible assets?

intangible assets?

1. identifiability 1. identifiability

2. control over a resource 2. control over a resource

3. expectation of future economic benefits 3. expectation of future economic benefits

flowing to the enterprise. flowing to the enterprise.

Is goodwill an intangible asset?

Is goodwill an intangible asset?

Yes, but we DONT value goodwill and show in Yes, but we DONT value goodwill and show in accounts, unless we have actually paid price for  accounts, unless we have actually paid price for 

acquisition of goodwill acquisition of goodwill

Example of intangible assets?

Example of intangible assets?

Designs / drawings Designs / drawings Patents Patents Trademark  Trademark  Copyright Copyright know-how know-how Software Software

How to record cost of intangible

How to record cost of intangible

assets?

assets?

Intangible assets should be values only if Intangible assets should be values only if ::

1. it is going to

1. it is going to generate future economicgenerate future economic  benefits

 benefits 2. its costs can

2. its costs can be reliably measured.be reliably measured.

As soon as these critiria are fulfilled, we have As soon as these critiria are fulfilled, we have

to undertake costing of the

What are the accounting standards

What are the accounting standards

on valuation of intangible assets?

on valuation of intangible assets?

AS 26 : It is the

AS 26 : It is the main document in India for main document in India for  valuation of intangible

valuation of intangible assets.assets.

If Intangible assets have been acquired / If Intangible assets have been acquired /  purchased through amalgam

 purchased through amalgamation ation etc. Read ASetc. Read AS 14 for accounting standards.

What are the different phases in

What are the different phases in

intangible assets?

intangible assets?

There are two phases in intanble assets : There are two phases in intanble assets :

1. research phase 1. research phase 2. development phase 2. development phase

 No Intangible assets should be recognised  No Intangible assets should be recognised

during research phase. They should be during research phase. They should be recognised only during development phase. recognised only during development phase.

When does the develo

When does the development

pment phase

phase

start ?

start ?

When the intangible assets has been approved When the intangible assets has been approved through feasibility study and it has

through feasibility study and it has been foundbeen found fit

fit to to ::

1. to generate economic benefit for the 1. to generate economic benefit for the

enterprise enterprise 2. it can be

2. it can be sold out in the marketsold out in the market 3. it can be used comm

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