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

Need and Concepts of Share Valuation for CMA Final

Updated 11 October 2026 · Fact-checked

Share valuation estimates what a share is worth, because the price on paper or in the market may not show true worth. You value shares for mergers, taxation, pledging, buyouts and similar needs. To solve questions, identify the purpose, pick the right value concept (book, intrinsic, fair or market), then apply the matching method.

Understand Need and Concepts of Share Valuation

A share is a claim on a company's net assets and future earnings. Its face value is only a legal label. Its worth depends on what the company owns, earns and is likely to earn. Share valuation is the process of putting a rupee figure on that worth.

You need a valuation when no reliable price exists or when the price cannot be trusted. Common cases: amalgamation and exchange ratios, buying out a minority, shares of an unlisted company, gift or wealth purposes, security for a loan, compensation on nationalisation or compulsory acquisition, and employee share plans. The purpose decides the method and the value you report.

Factors affecting value fall into three groups.

Company factors: asset backing, earning capacity, dividend record, quality of management, capital structure, nature of the business, and future prospects.
Market and economy factors: interest rates, industry cycle, investor sentiment, inflation, government policy, and demand and supply of the shares.
Shareholding factors: size of the block (a controlling stake is worth more per share than a small one), restrictions on transfer, and liquidity.

There is no single "true" value. Four concepts are used:

Book value: net worth as per the balance sheet, divided by the number of equity shares. It uses historical accounting figures.
Intrinsic value (net asset value): value of assets at their realistic worth less outside liabilities, divided by equity shares. It looks at what the business owns.
Market value: the price at which the share trades on a stock exchange. It reflects investor views and can swing with sentiment. Thinly traded shares may give a poor guide.
Fair value: the price a willing buyer and seller would agree on, both informed and acting freely. In the Indian exam context it is often the average of the net asset value and the yield (earnings-based) value. Do not confuse this with the Ind AS 113 definition, which is an exit price in an orderly transaction between market participants at the measurement date.

Under Ind AS 113, the fair value measurement determines the asset or liability being measured, the valuation premise for a non-financial asset, the principal (or most advantageous) market, and the valuation technique(s) suited to the data available. That gives a useful link: valuation always starts with a clear purpose and a defined unit.

Key rules to remember

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.

How to solve Need and Concepts of Share Valuation questions

Use this order for any theory or numerical question on the need and concepts of share valuation.

1Read the purpose of the valuation in the question (merger, sale of a block, pledge, tax, minority buyout). The purpose often decides the concept.
2List the facts given: balance sheet items, market price, profits, dividends, number of shares, control or minority stake.
3Name the value concept needed: book, intrinsic, market or fair. State its meaning in one line.
4Adjust the figures: remove fictitious assets, restate assets and liabilities to realistic values if asked, deduct preference capital.
5Compute the value per share, showing the numerator and the number of equity shares separately.
6Compare values if the question asks, and explain why they differ (historical cost vs current worth, sentiment vs substance).
7Close with a one-line conclusion tied to the purpose, such as which value suits the buyer or the seller.

Quickest way: Four-line value ladder

When to use it: Use in MCQs and short theory answers asking you to distinguish or choose between the value concepts.

Book value asks: what do the books say? Historical, accounting-based.
Intrinsic value asks: what are the assets really worth? Realistic, asset-based.
Market value asks: what does the market pay today? Price-based, affected by sentiment and liquidity.
Fair value asks: what would informed parties agree on? Usually a blend of asset and earnings views.

Common mistakes in Need and Concepts of Share Valuation

Treating book value and intrinsic value as the same thing.
Both are computed from the balance sheet and both are divided by the equity shares.
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.
The share certificate shows only face value, so it looks like a price.
Fix: Face value is only a nominal amount. Compute worth from assets, earnings or market price.
Forgetting to deduct preference share capital before dividing by equity shares.
Students take total net worth and divide by all shares.
Fix: First deduct preference capital and any arrears payable, then divide the balance by equity shares.
Including fictitious assets such as preliminary expenses or the debit balance of profit and loss in net assets.
They appear on the asset side of the balance sheet.
Fix: Exclude them, as they have no realisable value.
Assuming market value is always the best measure of worth.
A quoted price looks objective.
Fix: Note that thin trading, speculation or small stakes can distort it. For unlisted companies there may be no market price at all.
Mixing the valuation convention of fair value with the Ind AS 113 definition.
Both use the words fair value.
Fix: State which one you mean. In an Ind AS 113 context, fair value is an exit price between market participants at the measurement date.

Worked examples

Example 1

The balance sheet of Kaveri Textiles Ltd shows equity share capital of ₹10,00,000 (1,00,000 shares of ₹10 each), 10% preference share capital of ₹2,00,000, general reserve ₹3,00,000, profit and loss account (credit) ₹1,00,000 and preliminary expenses to be written off ₹20,000. Compute the book value per equity share.

Show the solution

Net worth before adjustments: equity capital ₹10,00,000 + preference capital ₹2,00,000 + reserve ₹3,00,000 + profit ₹1,00,000 = ₹16,00,000.
Deduct the fictitious asset: ₹16,00,000 − ₹20,000 = ₹15,80,000.
Deduct preference share capital: ₹15,80,000 − ₹2,00,000 = ₹13,80,000. This belongs to equity shareholders.
Divide by number of equity shares: ₹13,80,000 ÷ 1,00,000 = ₹13.80.

Answer: Book value per equity share = ₹13.80.

Example 2

For Kaveri Textiles Ltd above, land carried at ₹4,00,000 is worth ₹6,50,000 and stock carried at ₹2,00,000 is worth ₹1,80,000. Other items are at book value. Compute the intrinsic value per equity share, and state why it differs from book value.

Show the solution

Start with the adjusted net assets for equity: ₹13,80,000 (from the previous example).
Add the increase in land: ₹6,50,000 − ₹4,00,000 = ₹2,50,000.
Deduct the fall in stock: ₹2,00,000 − ₹1,80,000 = ₹20,000.
Intrinsic net assets for equity: ₹13,80,000 + ₹2,50,000 − ₹20,000 = ₹16,10,000.
Divide by 1,00,000 shares: ₹16,10,000 ÷ 1,00,000 = ₹16.10.
Explain the difference: ₹16.10 against ₹13.80, because intrinsic value restates assets to realistic worth, whereas book value follows historical cost.

Answer: Intrinsic value per equity share = ₹16.10, higher than the book value of ₹13.80 because the land is worth more than its book amount.

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.

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

Need and Concepts of Share Valuation in other exams

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

Need and Concepts of Share Valuation: frequently asked questions

Why are shares valued when a market price exists?

A market price may be missing for unlisted companies, or unreliable when trading is thin or sentiment is extreme. Mergers, buyouts, taxation and pledges also need a value based on assets and earnings.

What is the difference between intrinsic value and market value of shares?

Intrinsic value is based on the realistic worth of the company's assets less liabilities. Market value is the price at which the share trades, shaped by demand, supply and investor sentiment. They can differ widely.

Is fair value the same as intrinsic value?

No. In valuation problems, fair value is often the average of the net asset value and the yield value. Under Ind AS 113, it is the exit price in an orderly transaction between market participants at the measurement date.

Which factors affect the value of a share?

Asset backing, earning capacity, dividend record, management quality, capital structure and future prospects affect it. So do interest rates, industry conditions, investor sentiment, size of the stake and liquidity.