Question

1 Zero growth

2 Constant growth

3 Variable growth

4 Cash free valuation mode

l 5 Book value 6Liquidation value

7 Price/earning multiple approaches

Writing methods for valuing shares, with the exception of the methods mentioned above Writing two ways in general the negatives and positives / definition of the method / example / equation ... etc

Answer 1

The two methods of valuation of shares that are different from the above stated in the question are:-

1. Asset-Backing Method:-

The valuation is done on the basis of the assets of the organization, it is known as Asset-Basis or Asset- Backing Method. In that period of time, the shares are valued on the basis of real internal value of the assets of the organization and that is why the method is also called as Intrinsic Value Method or Real Value Basis Method.

This method can be considered in either of the two ways:-

i)On a going/continuing concern basis; and

(ii) Break-up value basis.

In the case of on going method, the function of the assets is to be considered for the motive of reaching at the value of the assets, but, in the case of the Break up value basis, the realizable value of the assets is to be taken. Under Asset backing method, value of the net assets of the company is to be determined first.

Thereafter, the net assets are to be divided by the number of shares in order to get out the value of each share. At the same time, value of goodwill, investment (non-trading assets) are to be added to net assets. In the same way, if there are any preference shares, those are also to be deducted with their arrear dividends from the net assets.

Formula of this method is stated in the image attached

For example, landowners may collaborate with appraisers to work out a property’s market worth. Over time, property values increase, and a proprietor may realize a piece of property is worth more today than it was five years ago. TIn the asset based approach, the new value is quoted. On the other side, liabilities generally arise at true market value. Usually, no further calculations are done. Asset valuation determines the cost of recreating a similar business.

Advantages of Asset backing method:-

1. It is easy because the past information are present.
2. Shows the present market values.
3. Estimates the benefits that can arise in the futures

Asset-based valuation is not without its drawbacks. Not similar to other methods, such as the income approach, the asset-backing method disregards a company’s future earnings. Putting issues aside, a company’s business value can be quite higher compared to when its existing assets are disposed of product by product.

2. Return on Capital Employed Method:

Under the return on capital employed method, valuation of share is made on the basis of rate of a return after tax on capital employed. Rate of return are taken on the basis of predetermined/expected rates of return which an investor may expect on the investments. We have to determine the capital sum for such return, after calculating expected earnings.

Thus, we are to follow the following procedure one by one:

(a) Ascertain the expected maintainable profit (after considering adjustments);

(b) Calculate the normal rate of return on capital employed for a similar line of business;

(c) At the end, on the basis of expected rate of return, capitalize the maintainable profit.

The advantage is it is used by most investors as one of the criteria for their investment portfolio and strategy.

The drawback is the return is not reflective of the market value.

Example along with equation is attached in the image:-