Ahmad (Akhlaque) (50 Points)
18 June 2011Can anybody guide me about the calculation of Networth of a Private Company for Allotment of new shares to its directors. More specifically I want to know appropriate method of valuation to be adopted for Company so as to correctly price new shares.
Thanks in Anticipation.
CS Nadeem Ahmed Siddique
(Company Secretary)
(354 Points)
Replied 21 June 2011
Dear Sir, the valuation of shares of a private limited company can be done under the following two methods:
1) Net Asset Value Method- Under this method, the total assets calculated are reduced by liabilities and prefered claims and then the remainder is divided by the number of equity shares outstanding on a particular date. The net asset value as calculated from the asset side of the balance sheet will be cross-checked with equity share capital plus free reserves and profit & loss account surplus minus the contingent liabilities.
2) Earning Based Method- Under the second method (also known as the profit earning capacity value method) a resonable estimate of the average future maintainable operating profit is made by taking the (a) Past earnings (b) The trend and (c) The future plans of the company as a base. Then after deducting preferred rights if any to such estimate, it is to be capitalised at an appropriate rate as under:
i) 15% in the case of manufacturing companies.
ii) 20% in the case of trading companies.
iii) 17.5% in case of companies whose turnover from trading activity is more than 40% but less than 60% of their total turnover.
CAclubindia
