Valuation of Shares (including Determination of Goodwill): formula sheet

Key formulas

Book value per share

(Equity share capital + Reserves and surplus − Fictitious assets) ÷ Number of equity shares

Uses book figures. Where preference shares exist, deduct their capital (and arrears if payable) first.

Intrinsic (net asset) value per share

(Realistic value of assets − Outside liabilities − Preference capital) ÷ Number of equity shares

Assets are taken at realistic values, and goodwill is included only if it is valued. Fictitious assets are excluded.

Fair value (common exam convention)

(Intrinsic value per share + Yield value per share) ÷ 2

Use only when the question says so or asks for a combined view. The weights may differ if the question gives them.

Face value vs value

Face value is fixed by the Memorandum; worth is estimated

Never treat face value as the value of a share.

Ind AS 113 fair value objective

Price in an orderly transaction to sell an asset or transfer a liability between market participants at the measurement date under current market conditions

Paragraph B2 of Ind AS 113. This is the accounting definition, different from the valuation-method convention above.

Net assets available to equity

Net assets for equity = Adjusted assets − Outside liabilities − Preference capital − Arrears of preference dividend

Adjusted assets exclude fictitious assets and are at realisable or fair values given in the question. Deduct arrears only if payable.

Intrinsic value per equity share

Value per share = Net assets for equity ÷ Number of equity shares

Use this directly when all equity shares are fully paid and rank equally.

Fully paid share (call-up method)

Value of fully paid share = (Net assets for equity + Uncalled amount on partly paid shares) ÷ Total number of equity shares

Assumes the unpaid money is called and received.

Partly paid share (call-up method)

Value of partly paid share = Value of fully paid share − Unpaid amount per share

Check: total of all share values must equal net assets before the notional call.

Proportionate method

Value per ₹1 paid-up = Net assets for equity ÷ Total paid-up equity capital; Share value = Paid-up amount × Value per ₹1

Use only if the question asks for it or treats shares in proportion to amount paid.

Value per share, dividend yield method

Value per share = (Expected dividend rate ÷ Normal rate of return) × Paid-up value per share

Use for minority holdings. The expected rate is dividend as a percentage of paid-up value.

Value per share, dividend in rupees

Value per share = Expected dividend per share ÷ Normal yield

Use when the dividend is given in rupees per share.

Maintainable profit

Average adjusted profit after tax − Preference dividend = Profit available to equity shareholders

Adjust for non-recurring items, abnormal items and expected changes before averaging.

Value of equity, earnings yield method

Value of equity = Maintainable profit for equity ÷ Normal earnings yield

Divide by the yield as a decimal, for example 12.5% = 0.125.

Earnings per share

EPS = Profit available to equity shareholders ÷ Number of equity shares

Use the weighted number of shares if the question says shares changed during the year.

P/E method

Value per share = EPS × P/E ratio

P/E ratio = 100 ÷ normal earnings yield (%).

P/E ratio from market data

P/E ratio = Market price per share ÷ EPS

A comparable company's P/E is often used to value an unlisted company.

Intrinsic (net asset) value per share

(Total assets at realisable value − outside liabilities − preference capital) ÷ number of equity shares

Use the figure available to equity holders. Add arrears of preference dividend to the deductions if the question says they are payable.

Yield value per share

(Expected rate of return ÷ Normal rate of return) × Paid-up value per share

Expected rate = maintainable profit available to equity ÷ paid-up equity capital × 100. Profit is after tax and after preference dividend.

Yield value (alternative)

(Maintainable profit to equity ÷ Normal rate) ÷ number of equity shares

Gives the same answer as the first form when all shares are equally paid up.

Fair value (combined method)

Fair value per share = (Intrinsic value + Yield value) ÷ 2

If weights are given, use (w1 × intrinsic + w2 × yield) ÷ (w1 + w2).

Ex-rights price

(Old shares × cum-rights price + new shares × issue price) ÷ (old shares + new shares)

Assumes the market value of the company rises only by the cash raised.

Value of a right

Value of right per share held = cum-rights price − ex-rights price

Value of the right to buy one new share = ex-rights price − issue price.

Value after bonus issue

Value per share after bonus = Value per share before bonus × old shares ÷ (old shares + bonus shares)

Total value of the holding stays the same. Only the number of shares and the price per share change.

Next dividend

D1 = D0 × (1 + g)

D0 is the dividend just paid. If the question gives the dividend expected next year, use it directly as D1.

Gordon growth model

P0 = D1 ÷ (ke − g)

Needs constant growth forever and ke > g. P0 is the value today, just after D0 is paid.

Zero growth

P0 = D ÷ ke

Special case of Gordon with g = 0.

Implied cost of equity

ke = (D1 ÷ P0) + g

Rearranged Gordon model. Use it when the market price is given.

Growth from retention

g = b × r

b is the retention ratio and r is the return on equity. It assumes r stays constant. Use only when the question gives these inputs.

Two-stage value

P0 = Σ Dt ÷ (1 + ke)^t for the fast-growth years + [Dn+1 ÷ (ke − g)] ÷ (1 + ke)^n

n is the last year of the fast-growth stage. g is the stable growth rate after that.

Present value of a cash flow

PV = CF ÷ (1 + r)^t

Used for every year in a DCF.

Equity value from DCF

Equity value = Enterprise value − Debt (net of cash if stated)

Divide by the number of equity shares to get value per share.

Capital employed (net assets)

Capital employed = Fixed assets (excluding goodwill) + Current assets (excluding fictitious assets and non-trade investments) − Outside liabilities

Use values at the date of valuation. Decide whether to use opening, closing or average capital employed as the question directs.

Average profit method

Goodwill = Average maintainable profit × Number of years' purchase

Number of years' purchase is given in the question.

Super profit

Super profit = Average maintainable profit − Normal profit; Normal profit = Capital employed × Normal rate of return

If super profit is negative or nil, goodwill is nil under this method.

Super profit method

Goodwill = Super profit × Number of years' purchase

Years' purchase is a judgement given in the question.

Annuity method

Goodwill = Super profit × Present value annuity factor

Treats super profit as a stream received for a limited number of years. The rate and the number of years are given in the question, and the annuity factor is taken for that rate and those years from the present value annuity table supplied.

Capitalisation of average profit

Capitalised value = Average profit × 100 ÷ Normal rate; Goodwill = Capitalised value − Capital employed

The result is the value of the whole business less its net assets.

Capitalisation of super profit

Goodwill = Super profit × 100 ÷ Normal rate

This gives the same goodwill as the capitalisation of average profit method only when the same capital employed and the same normal rate are used in both.

Quick revision

• Fair value is the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
• Fair value is market-based, not entity-specific. Your intention to hold an asset is not relevant.
• Ind AS 113 does not apply to share-based payments under Ind AS 102 or to leasing under Ind AS 116.
• Net realisable value under Ind AS 2 and value in use under Ind AS 36 are not fair value.
• Valuation techniques should maximise relevant observable inputs and minimise unobservable inputs.
• Income approach techniques include present value techniques, option pricing models and the multi-period excess earnings method.
• Net asset value per share = (assets at fair values less outside liabilities less preference capital) ÷ number of equity shares.
• Adjust profits before capitalising: remove non-recurring items and correct depreciation and stock errors.
• Super profit = average maintainable profit less normal profit on capital employed.
• Goodwill by capitalisation = actual capitalised profit less net assets, or super profit ÷ normal rate.
• State all assumptions clearly in written answers.
• In a risk-adjusted valuation, never leave out the risk adjustment just because it is hard to estimate.

Common mistakes

• Treating book value and intrinsic value as the same thing. Fix: Book value uses recorded figures. Intrinsic value uses realistic values of assets and liabilities, such as revalued land. Say which one is asked.
• Using face value as the worth of a share. Fix: Face value is only a nominal amount. Compute worth from assets, earnings or market price.
• Deducting reserves and accumulated profits as liabilities Fix: They belong to equity holders. Deduct only outside liabilities and preference capital.
• Keeping preliminary expenses or the debit balance of profit and loss as assets Fix: Treat them as fictitious assets with no realisable value and exclude them.
• Using total profit instead of profit after preference dividend Fix: Always deduct the preference dividend and tax before computing equity profit.
• Including non-recurring or abnormal items in maintainable profit Fix: Read every note on profits. Remove one-off gains and losses, and adjust for stated future changes.
• Taking yield value on total profit without deducting preference dividend Fix: Always deduct preference dividend from profit after tax before capitalising for equity holders.
• Not deducting preference capital when finding net assets for equity Fix: Deduct outside liabilities and preference capital, with any arrears, from the assets before dividing by equity shares.
• Using D0 instead of D1 in the Gordon formula. Fix: Read the wording. 'Just paid' or 'last year' means D0, so multiply by (1 + g).
• Applying the Gordon model when g is greater than or equal to ke. Fix: Check ke − g first. If the check fails, the constant-growth model cannot be used for that stage.

Exam tips

• In theory answers, define each value in one line and then give a contrast. Examiners reward clear distinctions.
• State the purpose of valuation before choosing the method. It shows application, not recall.
• In numerical questions, show the adjustments line by line: fictitious assets, preference capital, revaluations. Marks are given for each step.
• For MCQs, watch the wording: book, intrinsic, fair and market values will all appear as plausible options. Match the definition exactly.
• If the question mentions Ind AS 113, use the exit price definition and mention market participants, not the average-of-two-methods convention.
• Show the asset list with a book value column and a revised value column. Marks are given for each adjustment even if the final figure is wrong.
• Read the question for the stated method on partly paid shares. If it is silent, use the call-up method and say so in one line.
• State your assumption when a point is unclear, such as arrears of preference dividend or a contingent liability, and apply it consistently.