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help needed in valuation of shares and intangible assets.

Simranjeet Singh (Proprietor at S Simranjeet & Associates Company Secretaries) (4396 Points)

10 May 2010

can any one tell me in valuation of shares and intangibe assets

1. what is the meaning of net assets back up , Normal rate of return

2. relationship b/w net asset back up and normal rate of return

3. why normal rate of return should be lower.

4. what is the treatment of liability to outsiders while calculating intrinsic value of shares

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8 Replies

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 10 May 2010

Hi i dont know what NET ASSETS BACK UP means... I mean, never heard of such term....

While normal rate of return is the RETURN expected on capital invested in the business... In simplest language, we can say when u spent Rs. 10 then u expect some benefit for the same. Similarily, when capital is invested in business, then some return is expected, that is termed as NORMAL RATE OF RETURN...

Generally, such return is calculated considering the net assets, as that is the amount (we believe) generates income.

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CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 10 May 2010

Moreover, the third party liabilities (outsiders') are alwz deducted from the total assets...

Here the total assets should not include any fictitious assets like preliminary exps.... But an intangible asset like goodwill can be included in total assets (if its taken over too)....

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Rohit Singh (ca final) (126 Points)
Replied 10 May 2010

i think by net asset backup you seem to be referring to the asset backing ratio well when we are valuing shares and need to calculate NRR the asset backing ratio is one of the risk factors which helps us in calculating the normal rate of return of the organization by taking the industry NRR as the base .

Asset backing ratios show the relationship between the intrinsic value of shares and the paid up share capital higher the ratio lower the risk this ratio shows that in case of liquidation are the assets of the organizations less payments to all those before equity share holders is enough to repay theequity investment in the concern

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Rohit Singh (ca final) (126 Points)
Replied 10 May 2010

while calculating the NRR if the risk factor is favorable then you ignore it and if it is adverse you take an assumption as regard to the % with which NRR has to be increased and take .5%

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Rohit Singh (ca final) (126 Points)
Replied 10 May 2010

goodwill shall always be included while calculating the intrinsic value and you shall leave all fictitious assets

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Simranjeet Singh (Proprietor at S Simranjeet & Associates Company Secretaries) (4396 Points)
Replied 10 May 2010

Thanks Dhiraj and Rohit for ur helpful replies.

Simranjeet Singh (Proprietor at S Simranjeet & Associates Company Secretaries) (4396 Points)
Replied 10 May 2010

Hii Dhiraj in liabilities to outsiders u said it will be deducted from total assets. but in one of reference books its treatment is given like first it is included in total assets and then the same amount is deducted from total liabilities which ultimately means no effect. so which one to follow??? are u talking about total assets or net assets???

Simranjeet Singh (Proprietor at S Simranjeet & Associates Company Secretaries) (4396 Points)
Replied 10 May 2010

Net assets backing is important from the point of view of safety. the poor net asset backing will increase the normal rate since the investors consider themselves unsafe. how is it so???