Valuation Of Share: Definition, Needs, Types, Objectives & Methods

What Is Valuation Of Share?

The procedure or method which is adopted to evaluate the value of shares in a particular situation is known as Valuation Of Share. It is required to evaluate the shares when there is some problem that arises in the company and the stock exchange doesn’t present the true value of the share.

Normally shares are valued by the expert valuer as per the provision made by various task clauses. It is learn basically from 2 reason such as:

  • For special reasons when the market doesn’t reflect the true value of shares.
  • When there is no market price of the share.

What Are The Need For Valuation Of Share?

For the sake of clarification some of the most important circumstances that encourages for valuation of share are explained below:

For amalgamation and reconstruction

The primary need of valuation of share arises at the time of amalgamation and reconstruction. It is done to enable one company who is interested to take over paying purchase consideration.

For Reconstruction

The need for valuation of shares also arises at the time of resolution of the firm. Generally it is done in order to ensure smooth distribution of partnership property among partners by avoiding diffuse.

For taking loans

Another needs of valuation of shares arise at the time of making loans on securities or shares for financial institutions. It enables the credit worthiness of the company and the loan amount to be sanctioned to the concerned company.

For transfer of share

The valuation of share is also very much essential at the time of transfer of share from one company to another. Generally it is required to certify the fair value of shares by the auditor or by an accountant in order to ensure effective transfer.

For conversion

The valuation of shares is also essential for understanding the effective conversion process. The proper value of share enables to convert preference share to equity share or debenture to share in a simplified manner.

For declaring net asset value

The other most important need of valuation of share arises from declaring net assets value on a company. It ensures to find out the correct value of an asset and it’s financial position for declaring net asset value.

Determination of gift and wealth task

The need for the value of shares arises in order to determine adequate gift and wealth tasks. It enables taxation authorities to collect reasonable task amounts through the fair valuation of shares.

For share of private company

The proper valuation of shares is also essential at the time of purchase of shares of a private company. It is required due to the absence of quoted value of shares in the stock exchange of a private company.

Factor Affecting Valuation Of Share

  • Dividend declared by the company in the last 3 years.
  • Demand and supply of the shares of the company.
  • Nature of business.
  • Future prospects of the companyRate of return.
  • Management of the company.
  • Limitation of competition.
  • Number of shareholders.
  • Capital structure of the company.
  • Government Control.
  • Accumulated reserve of company.

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