Net Assets Basis or Intrinsic Value Method :
The method relating to net asset basis may take various forms depending upon circumstances:
(i) Break-up value method (or liquidation value method);
(ii) Appraised value method; and
(iii) Book-value method.
Depending on the circumstances of the case, goodwill may or may not be included. Goodwill comes in for distinct consideration only when the number of shares involved is large giving to the holder a measure of control. Normally, earning represents the result of application of all assets of every description in the business, whether it is plant and machinery or goodwill or patent or know-how; for a small number of shares in a going concern, earning is the only appropriate basis.
Valuation of shares on the basis of assets is generally not recommended for a going concern, because, there, the predominant factor is yield; but for certain types of companies, for example, investment companies, assets basis valuation may be acceptable since yield itself will depend almost wholly on the assets position. In case of a company in respect of which no realistic yield or earning capacity is discernible, because of highly uneven past
results, valuation only on assets basis may be acceptable.
For a company which shows consistent loss over a number of immediate past years and which has no apparent prospect of recovery, the appropriate method would be the break-up value method. According to Sidney, an authority in share valuation, the realisable value of assets, for arriving at the break-up value, should be discounted at rates varying from 20% to 331/3% for taking care of realisation losses and expenses. Book value method does not have any practical application except to disclose the unexpired costs of asset of a going concern which were acquired in the course of the company’s operations. But statutes like the Gift Tax Act, Wealth Tax Act, etc., have in fact adopted book value method for valuation of unquoted equity shares for companies other than an investment company. Book value of assets does help the valuer in determining the useful employment of such assets and their state of efficiency. In turn, this leads the valuer to the determination of rehabilitation requirements with reference to current replacement values.
In all cases of valuation on assets basis, except book value basis, it is important to arrive at current replacement and realisation value. It is more so in case of assets like patents, trade marks, know-how, etc., which may possess values substantially more or less than those shown in the books. The mechanism of asset valuation is simple:
(i) Arrive at the current replacement costs of assets for valuation based on appraisal or, in the case of a firm which is not a going concern, determine the net realisable value for break-up valuation and deduct therefrom all liabilities in the books of account and such other liabilities which have not been recorded but are likely to rank for payment, and the amount payable to preference shareholders. The approach should be conservative. Under provision for taxation, liabilities on account of gratuities, arrears of preference dividends, etc., are instances, of what may not appear in books.
(ii) If circumstances suggest existence of goodwill from a study of the profit record, particular advantages, etc., the same should be evaluated with reference to any method appropriate for the purpose for addition to the result obtained in (i) above.
(iii) The result, as arrived at, shall represent the asset value for the whole undertaking; to arrive at value per share, the same should be divided by the number of equity shares in the company provided all shares are equally paid-up. If the company has equity shares of varying fully paid-up values, the total value should first be allocated to the different paid-up value groups and each such allocation would be divided by the number of shares in each of such groups.