25 September 2010
hi, A shareholder of the company wishes to sell his shares to the Managing Director who is also the shareholder of the company. what shall be the consideration that is to be paid for such transfer.
i Fell it shall be EPS(earning per share)...i.e. net worth / no. of shares of the company Now as the company is a public unlisted company so no question of market price arises so in that case it shall be EPS only
Kindly tell me if i am right? In case i m not plzz guide me with the suitable solution to my query... i also which to know the tax to be paid by the transferee/or for the above transaction?
26 September 2010
The logical step is to value the company and then divide that value with the diluted number of shares (i.e. outstanding shares plus the number of shares proposed to be issued). This will give the value of one share to be issued. The next thing is to decide how to value the company.
Net asset value sounds perfectly reasonable - you take all assets at market value and deduct from that all external liabilities (also at market value). The only problem is this method values the assets the company holds rather than the company itself.
DCF is generally preferred for valuing a company but that can get quite involved. A valuation based on EPS can is fairly simple and often quite acceptable. BTW EPS is NOT the way you have defined in the question. EPS is earning per share but the ratio you have mentioned is Book Value Per Share.
While using EPS you need the PE ratio . The correct PE ratio for your company would be the average PE ratio for that industry (business) in which your company is engaged. This is easily obtained from various databases / publications. Take this PE ratio and multiply it with EPS to get value of current shares. Multiply this value with outstanding shares to get value of the company. Now divide this value with diluted number of shares (as described earlier) to get the value of a share to be issued now.
CAclubindia
