Valuation of Shares, Goodwill & Members Interest

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a bird’s eye view of a desk with a laptop, a chart, some books and a succulent on itShares:

The valuation date value of shares listed on a foreign recognized exchange that are not listed on the JSE must be determined on the same basis as local shares. However, unlike local shares the market value of the shares is based on the ruling price on the last business day preceding valuation.

The methods of valuation depend on the purpose for which valuation is required. Generally, there are three methods of valuation of shares;

Three Methods of Valuation of Shares

1.Net Assets Method of Valuation of Shares

Under this method, the net value of assets of the company are divided by the number of shares to arrive at the value of each share. For the determination of net value of assets, it is necessary to estimate the worth of the assets and liabilities. The goodwill as well as non-trading assets should also be included in the total assets. The following points should be considered while valuing of shares according to this method;

  • Goodwill must be properly valued
  • The fictitious assets such as preliminary expenses, discount on issue shares and debentures, accumulated losses et cetera should be eliminated.
  • The fixed assets should be taken at their realizable value.
  • Provision for bad debts, deprecation et cetera must be considered.
  • All unrecorded assets and liabilities (if any) should be considered.
  • Floating assets should be taken at market value.
  • The external liabilities such as sundry creditors, bills payable, loan, debentures et cetera should be deducted from the value of assets for the determination of net value.

The net value of assets, determined so has to be divided by number of equity shares for finding out the value of share. Thus, the value per share can be determined by using the following formula;

2.Yield or Market Value Method of Valuation of Shares

The expected rate of return in investment is denoted by yield. The term “rate of return” refers to the return which a shareholder earns on his investment. Further it can be classified as (a) Rate of Earning and (b) Rate of dividend. In other words, yield may be earning yield and dividend yield.

a.Earning Yield

Under this method, shares are valued based on expected earning and normal rate of return. The value per share is calculated by applying following formula;

Value per Share = (Expected rate of earning/Normal rate of return) X Paid up value of equity share
Expected rate of earning = (Profit after tax/paid up value of equity share) x 100.

b.Dividend Yield

Under this method, shares are valued based on expected dividend and normal rate of return. The value per share is calculated by applying the following formula;

Expected rate of dividend = (profit available for dividend/paid up equity share capital) x 100
Value per share = (Expected rate of dividend/normal rate of return) x 100

3.Earning Capacity Method of Valuation of Shares

Under this method, the value per share is calculated on the basis of disposable profit of the company. The disposable profit is found out by deducting reserves and taxes from net profit. The following steps are applied for the determination of value per share under earning capacity;

  • Step 1: To find out the profit available for dividend
  • Step 2: To find out the capitalized value
    Capitalised Value = (Profit available for equity/Normal rate of return) x 100
  • Step 3: To find out value per share
    Value of share = Capitalised value / Number of Shares

Goodwill:

Goodwill is a special type of intangible assets that represent that portion of the entire business value that cannot be attributed to other income-producing business assets, tangible or intangible. NEED FOR VALUATION OF GOODWILL: Generally, goodwill may be valued at the time of disposal of business of the firm.

A firm’s reputation of generally assessed by Goodwill earned by the firm during its tenure. The Goodwill has been defined by many, but no one has given a crystal-clear definition. “Goodwill” is generally used in business world, to access the value of the firm. It is common notion that if a firm is a profitable one it is valued high and in turn attracts goodwill. Now we can say that reputation of a firm coupled with its going profitability represents “Goodwill,” but goodwill can be realized and quantified in money’s worth when the firm is disposed of.

NEED FOR VALUATION OF GOODWILL: Generally, goodwill may be valued at the time of disposal of business of the firm. But in many cases the goodwill may be valued to find out value of the firm. In case of a proprietorship business it will be valued at the time of disposal of business, in case of firm it may be calculated at the time of addition, resignation and disposal of firm. Now in case of companies the need for valuation of goodwill arises in the following circumstances;

  1. In case of Amalgamation of company;
  2. In case of takeover of one company by another or sold of business of one company;
  3. In case of a company wants to write off or reduce debit balance in its profit and loss account;
  4. In case of a company wants to exercise controlling interest in other company;
  5. In case of valuation of shares of an Unlisted Company;
  6. In case of conversion of shares from one class to another class;
  7. In case of company’s management has been taken over by Government and some events in which valuation of Goodwill held.

Factors Affecting the Value Goodwill:

  1. The profitability of company is past and expected profit in future will affect value of Goodwill;
  2. Capital Employed to earn profit;
  3. The yield from business as expected by investors;
  4. The longevity of existence of business concern;
  5. Market share of products of entity;
  6. Quality of services rendered;
  7. The edge of concern over its competition in the market;
  8. Relationship between management and staffs;
  9. Location of business enterprises;
  10. Brand position and efforts taken to establish brand of the concern,
  11. Technical innovation, modern technology, patents, et cetera
  12. Tax Planning;
  13. Relationship with Government, local bodies;
  14. There are some other factors affecting the value Goodwill.

Methods of Valuation Goodwill:

Following are the methods;

  1. Average Profits Method;
  2. Super Profits Methods;
  3. Capitalisation Method;
  4. Annuity Method.

Member Interest:

“Membership interest” or “interest” means a member’s collective rights in a limited liability company, including the member’s share of profits and losses of the limited liability company, the right to receive distributions of the limited liability company’s assets and any right to vote or participate in management.