Download How Valuate Shares & Intangible Assets...
HOW TO VALUATE SHARES & INTANGIBLE ASSETS by : DR. T.K. JAIN AFTERSCHOOL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR ± CSE & PGPSE PGPSE STUDEN STUDENTS TS (CSE & PGPSE are free online programmes open for all, free for all) 5 DECEMBER 09
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My word..... My purpose here is to give a few ideas about strategic management for intrapraneurs. Read a lot. Be an intrepreneur, change the society, change the world. Go with positive spirit. Please pass this presentation to all those who might need it. Let us spread knowledge as widely as possible. I welcome your suggestions. I also request you to help me in spreading social entrepreneurs entrepreneurship hip across the the globe ± for which I need need support support of you people people ± not of any VIP. VIP. With your your help, I can spread spread the the ideas ± for which which we stand.... stand.... 5 DECEMBER 09
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Why do we need to undertake valuation of shares ? 1. when we are paying tax (wealth tax / gift tax / income tax / other taxes) 2. mergers and amalgamation of companies 3. issue of shares to employees 4. when there is need for reconstruction of the capital of the company 5. to show the value in books of accounts 6. other reasons as required by law 5 DECEMBER 09
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What are the methods of valuation of shares ?
There are 2 mthods : 1. net assets basis and 2. earning capacity or yield yield basis.
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What are the methods in Net Assets Based valuation methods? We have 3 methods of valuation in Net Assets based valuation methods. 1. break up value method 2. Book value method 3. Appraisal value method 5 DECEMBER 09
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When is break up value val ue method more useful?
When we are undertaking valuation of a sick company / closed company / a company which is not likely to remain operational
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When is book value method more useful?
For the purpose of taxation, and other similar formalities
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When is appraisal value method more useful ?
When we are undertaking valuation for the purpose of purchase / sale of shares etc.
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How to undertake valuation in net assets based methods ? Find the value of assets, deduct the value of liabilities, find net assets. Divide net assets by number of shares to get the value of each share. Example : Assets Assets = 100, liabilities liabili ties = 40, number of shares are 5, (100-40)/5 = 12 per share so here the value of share is 12. 5 DECEMBER 09
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What is the difference difference between the three methods in Net Assets Based methods ? Break up value method method ± here we find find the break up value of each asset ± (what value value we will will get if we sell this this asset) Book value method looks at book value (from the accounts of the company), appraisal value method looks at value based on appraisal by experts / independent valuers The value of share will be different in each of these three methods. 5 DECEMBER 09
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What is earning capacity / yield method ?
Here the value of share is calculated by either of the following : 1. dividend 2. earning capacity
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How to value share using dividend method ?
Find the value of share using the following formula : (Dividend rate / normal dividend rate) * Paid up value of a share
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How to value share using earnings method ?
We will use the following formula formula for determination of value of share : (earnings rate / normal earnings rate) * Paid up value of a share
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How to find normal rate of return ? It is a crucial issue. The value of the share is based on normal rate of return. If we are prudent, we will be able to fix appropriate normal rate, thus the valuation will be proper. Normal rate depends on many factors and on the overall expectations of the investors. 5 DECEMBER 09
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Factors affecting normal rate of return? 1. whether it is secured or unsecured 2. investors expectations of risks 3. investors' perception of industry trend, future direction, likely risk 4. returns available in other sectors 5 DECEMBER 09
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Example .... Normal rate of return for government bonds will be less than corporate bonds, the normal rate for corporate bonds will be less than preference shares, which will also also be less in comparison comparison to equity shares. It all depends on investor's expectations of risks attached to the instrume i nstruments nts 5 DECEMBER 09
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How to value share using fair value method ?
Fair value method is arithematic mean of Net assets based value and yield based value. Thus its formula : = (Net assets based value + yield value) / 2
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How to value intangible intangible assets ? There are three important methods : 1. cost of the asset 2. future earning potential 3. if acquired acquired in exchan exchange ge of securit securities ies ± then the value of the securities which have been exchanged 5 DECEMBER 09
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What is intangible asset?
Non-Mon Non-Monetary etary asset asset ± which doesn't doesn't have have physical bases, but it can generate income for the enterprise in future.
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What are the characteristics charact eristics of intangible assets?
1. identifiability 2. control over a resource 3. expectation of future economic benefits flowing to the enterprise. 5 DECEMBER 09
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Is goodwill an intangible asset?
Yes, but we DONT value goodwill and show in accounts, unless we have actually paid price for acquisition of goodwill
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Example of intangible assets? Designs / drawings Patents Trademark Copyright know-how Software 5 DECEMBER 09
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How to record cost of intangible assets? Intangible assets should be values only if : 1. it is going to generate future economic benefits 2. its costs can be reliably measured. As soon as these critiria are fulfilled, we have to undertake costing of the intangible assets. 5 DECEMBER 09
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What are the accounting standards on valuation of intangible assets? AS 26 : It is the main document in India for valuation of intangible assets. If Intangible assets have been acquired / purchased through amalgamation amalgamation etc. Read AS 14 for accounting standards. 5 DECEMBER 09
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What are the different phases in intangible assets? There are two phases in intanble assets : 1. research phase 2. development phase No Intangible assets should be recognised during research phase. They should be recognised only during development phase. 5 DECEMBER 09
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When does the development develo pment phase start ? When the intangible assets has been approved through feasibility study and it has been found fit to : 1. to generate economic benefit for the enterprise 2. it can be sold out in the market 3. it can be used commercially commercially in production / technology
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