Valuation based on rate of dividend :
This method of valuation is suitable for small blocks of shares because small shareholders are usually interested in dividends. The value of a share according to this method is ascertained as follows:
| Value of share = | Possible rate of dividend | x Paid up value per share | |
| Normal rate of dividend | |||
OR
= Dividend (in rupees) per share x 100
Normal rate of dividend
Possible rate of dividend = Total profit available for dividend x 100
Total paid up equity capital
In other words, dividend on equity shares should be calculated by deducting from the maintainable profits:
(i) taxation;
(ii) transfers to reserve;
(iii) transfers to debenture redemption fund;
(iv) preference dividend, and
by dividing the remaining by the number of shares.
Valuation based on rate of earning: This method of valuation of shares is suitable for valuing large block of company’s shares because they are more interested in company’s earnings rather than what the company distributes in the form of dividends. The value of a share on this basis can be calculated as follows:
Value of share = Rate of earning x Paid-up value per share
Normal rate of earning
Rate of earning = Actual profit earned x 100
Capital employed
Rate of earning is calculated by taking into account the total capital employed including long-term borrowings. Since the total capital is taken into account, the profit figure should be before debenture interest, preference dividend but after income tax. This is quite appropriate when the dividend is much more than the rate of earning on capital.
Valuation based on price earning ratio: This method is suitable for ascertaining the market value of shares which are quoted on a recognised stock exchange. According to this method, the shares are valued on the basis of earning per share multiplied by price earning ratio. Thus,
Market value of share = Price earning ratio x Earning per share
Earning per share = Profit available for equity shareholders
Number of equity shares
Price earning ratio = Market value per shar
Earning per share
Capitalisation factor: The value of a share according to yield basis can also be ascertained by finding out the capitalisation factor or the multiplier. The capitalisation factor will be ascertained by dividing 100 by the normal rate of return.
Capitalisation factor = 100_
Normal rate of return
The profit available is capitalised by multiplying it with the capitalisation factor. The value of equity share is obtained by dividing the capitalised value by the number of equity shares.