Fair Value of Shares

The fair value of a share is the average of the value of shares obtained by the net assets method and the one obtained by yield method. Under net assets method, the value of an equity share is arrived at by valuing the assets of a company and deducting therefrom all the liabilities and claims of preference shareholders and dividing the resultant figure by the total number of equity shares with the same paid up value. Under yield method, the value of an equity share is arrived at by comparing the expected rate of return with the normal rate of return. If the expected rate of return is more than normal rate of return, the market value of the share is increased proportionately. The fair value of shares can be calculated by using the following formula:

Fair value of share = Value by net asset method + Value by yield method
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This method is also known as dual method of share valuation. This method attempts to minimise the demerits of both the methods. This is of course, no valuation but a compromised formula for bringing the parties to an agreement.

However, it is recognised in Government circles for valuing shares of investment companies for wealth tax purposes.