Corporate Financial Reporting · Valuation of Shares (including Determination of Goodwill)

Fair Value and Combined Methods of Share Valuation

Updated 11 October 2026 · Fact-checked

In share-valuation problems, fair value is usually the simple average of the net asset (intrinsic) value and the yield value per share, unless the question gives other weights. For rights issues, find the ex-rights price as a weighted average, then the value of a right as cum-rights price minus ex-rights price. For bonus shares, spread the same total value over more shares.

Understand Fair Value and Combined Methods

No single method values a share perfectly. The net asset method looks at what the business owns. The yield method looks at what the business earns. Each can mislead on its own. An asset-rich company with poor profits looks too good on net assets. A profitable company with few assets looks too good on yield.

The combined method fixes this by blending the two. The traditional rule is fair value = (intrinsic value + yield value) ÷ 2. If the question gives weights, such as 2:1, use a weighted average instead. Read the question for any such instruction.

A caution on terms. In Ind AS 113, fair value means the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The average method is a share-valuation convention for exam problems, not the Ind AS 113 definition. Ind AS 113 (para 63) also says that when several valuation techniques are used, you evaluate the range of results and pick the point most representative of fair value. It does not tell you to average mechanically. Use the simple average only when the question says so or gives no other basis.

Rights and bonus issues change the number of shares and sometimes the cash in the company. In a rights issue, existing holders can buy new shares at a price usually below market. The market price falls after the issue date because new shares come in at a lower price. The post-issue price is the ex-rights price, and the old price is the cum-rights price. The gap between them is the value of the right.

In a bonus issue, no cash comes in. Reserves become capital and the share count rises. Total value stays the same, so value per share falls in proportion. A holder's total wealth does not change.

Key rules to remember

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.

How to solve Fair Value and Combined Methods questions

Use this order for any fair value, rights or bonus question. It keeps the working clean and the marks visible.

1Read what is asked: fair value by average, ex-rights price, value of right, or value after bonus. Note any weights or special instructions.
2List shares, paid-up values and any preference capital. Check whether shares are partly paid.
3Compute intrinsic value: revalue assets as instructed, deduct outside liabilities and preference capital, then divide by equity shares.
4Compute yield value: adjust profit for non-recurring items, tax and preference dividend, then divide by the normal rate or use the expected rate to normal rate ratio.
5Take the average, or the weighted average if weights are given, to reach fair value.
6For rights, find the ex-rights price from the weighted formula, then cum-rights price minus ex-rights price for the value of the right.
7For bonus, divide the total value by the enlarged share count. Check that the holder's wealth is unchanged.
8State the final answer per share, with the unit, and write a one-line conclusion.

Quickest way: Three-line shortcut for the exam

When to use it: Use when the question gives clean numbers and asks only for the final per-share value. Still show the intrinsic and yield workings, because marks go for steps.

Intrinsic value = net assets for equity ÷ shares. Yield value = profit for equity ÷ normal rate ÷ shares.
Fair value = add the two and halve.
For rights, treat one holding as a bundle: total value of the bundle ÷ total shares in the bundle. For 1 right share per 4 held, take 4 old and 1 new, add their values and divide by 5.

Common mistakes in Fair Value and Combined Methods

Taking yield value on total profit without deducting preference dividend
Students use profit after tax directly and forget that preference holders are paid first.
Fix: Always deduct preference dividend from profit after tax before capitalising for equity holders.
Not deducting preference capital when finding net assets for equity
Preference share capital is listed under share capital, so it looks like owners' funds.
Fix: Deduct outside liabilities and preference capital, with any arrears, from the assets before dividing by equity shares.
Always using a simple average even when weights are given
The average is the common default, so students stop reading.
Fix: Underline any weights or ratio in the question and use a weighted average if one is given.
Dividing the right's value by the wrong share count
Students mix the price of a right to one new share with the value per old share held.
Fix: Cum-rights minus ex-rights gives value per old share. Ex-rights price minus issue price gives value of the right to one new share. Label each clearly.
Adding cash raised in a bonus issue or ignoring cash in a rights issue
Both are share issues, so students treat them alike.
Fix: A bonus issue brings no cash, so total value is unchanged. A rights issue brings in cash equal to new shares times issue price.
Using paid-up value instead of face value, or the reverse, in the yield formula
Questions with partly paid shares use different values.
Fix: The yield formula uses paid-up value per share. Check the paid-up amount before applying it.

Worked examples

Example 1

Mehta Textiles Ltd has 1,00,000 equity shares of ₹10 each fully paid and ₹4,00,000 of 10% preference share capital. Total assets at realisable value are ₹22,00,000 and outside liabilities are ₹2,00,000. Maintainable profit after tax is ₹2,80,000. Normal rate of return on equity is 12%. Find the fair value per equity share as the average of intrinsic and yield values.

Show the solution

Net assets for equity = 22,00,000 − 2,00,000 − 4,00,000 = ₹16,00,000.
Intrinsic value per share = 16,00,000 ÷ 1,00,000 = ₹16.
Preference dividend = 10% of 4,00,000 = ₹40,000.
Profit available to equity = 2,80,000 − 40,000 = ₹2,40,000.
Expected rate of return = 2,40,000 ÷ 10,00,000 × 100 = 24%.
Yield value per share = (24 ÷ 12) × 10 = ₹20.
Fair value = (16 + 20) ÷ 2 = ₹18.

Answer: Fair value per equity share is ₹18, based on intrinsic value of ₹16 and yield value of ₹20.

Example 2

Shares of Kavita Foods Ltd are quoted at ₹60 cum-rights. The company offers 1 right share for every 4 shares held, at ₹40 per share. (a) Find the ex-rights price and the value of a right per share held. (b) Rohan holds 400 shares and sells his rights. Show that his wealth is unchanged. (c) After the rights issue, the company issues 1 bonus share for every 4 held. Find the price per share after the bonus, assuming total value is unchanged.

Show the solution

(a) Take 4 old shares and 1 new share: 4 × 60 = ₹240 and 1 × 40 = ₹40. Total ₹280 for 5 shares.
Ex-rights price = 280 ÷ 5 = ₹56.
Value of right per share held = 60 − 56 = ₹4. Check: the right to one new share is worth 56 − 40 = ₹16, and 16 ÷ 4 = ₹4 per old share.
(b) Before: 400 × 60 = ₹24,000.
Rohan has 100 rights, since 400 ÷ 4 = 100. Selling them at ₹16 each gives ₹1,600.
After: 400 × 56 = ₹22,400, plus ₹1,600 from the rights = ₹24,000. Wealth is unchanged.
(c) For every 4 shares worth 4 × 56 = ₹224, the holder receives 1 bonus share, giving 5 shares.
Price after bonus = 224 ÷ 5 = ₹44.80.

Answer: Ex-rights price ₹56. Value of a right ₹4 per share held, or ₹16 for the right to one new share. Rohan's wealth stays at ₹24,000. Price after the 1 for 4 bonus is ₹44.80.

Exam tips

Write intrinsic value and yield value as separate headed workings. Marks are given for each, even if the final average is wrong.
Check for weights, such as 2:1, and for partly paid shares before using the average or the yield formula.
In rights questions, state the assumption that the market value rises only by the cash raised. It earns the method mark.
Verify a bonus or rights answer by checking that the holder's total wealth is unchanged, as in the second example. It catches most slips.
If a case scenario mentions Ind AS 113, remember that fair value there is an exit price between market participants. Do not apply the simple average unless the question asks for it.

Practice questions from Valuation of Shares (including Determination of Goodwill)

Fair Value and Combined Methods in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fair Value and Combined Methods: frequently asked questions

Is fair value of a share always the average of intrinsic and yield value?

No. The simple average is the usual exam convention when no other basis is given. If the question gives weights or instructs otherwise, follow it. Ind AS 113 itself defines fair value as an exit price between market participants and does not prescribe a simple average.

How do I find the value of a right?

First find the ex-rights price using the weighted average of old shares at the cum-rights price and new shares at the issue price. The value of the right per share held is cum-rights price minus ex-rights price. The value of the right to buy one new share is ex-rights price minus issue price.

What happens to the share price after a bonus issue?

Total company value does not change because no cash comes in. The same value is spread over more shares, so the price per share falls. A holder's total wealth stays the same.

Should preference dividend be deducted for the yield value?

Yes. Yield value is for equity holders, so preference dividend must be deducted from profit after tax before you capitalise it. Preference capital is also deducted when finding net assets for equity.