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VALUATION OF SHARES Need and Methods
Shares Meaning:The capital of the company can be divided into different units with definite values called shares. Thus a share is the shared capital in the firm giving ownership right to the shareholder
Types of Shares There are two types of shares that a company may issue1. Preference Shares: A Preference share has following two features(i) A right to receive dividend at a given rate or amount before any dividend is paid. (ii) A right to repayment of capital in the event of winding-up of company.
2. Equity Shares: An Equity share has following features(i) It gets dividend and repayment after payment to preference shareholders. (ii) Rate of dividend is not fixed and is determined by Directors. (iii) Such shareholders may go without any dividend if no profit is made. (iv) They also have voting rights proportionate to one’s share in the paid-up equity capital.
Par value of shares: An amount is noted on each share of a company. This is known as the Par value of the share. It is also known as the face value of the share. Market value of Share: It is the value at which the share is sold or purchased in the market. Market value may be more or less than the face value of the share.
Valuation of Shares The shares which are included in the list of stock exchange are quoted but the shares which are not quoted are valued by various methods. Need for Valuation:(i) When two or more companies amalgamate (ii) When absorption of a company takes place. (iii) When some shareholders do not give their consent for reconstruction of the company, there shares are valued for the purpose of acquisition. (iv) When shares are held by the partners jointly in a company and dissolution takes place., it becomes necessary to value the shares for proper distribution of partnership property among the partners.
(v) When a loan is advanced on the security of shares. (vi) When shares of one type are converted into shares of another type (vii) When some company is taken over by the government, compensation is paid to the shareholders of such company and on this occasion, valuation of shares is made. (viii) When a portion of shares is to be given by a member of proprietary company to another member, fair price of these shares has to be made by an auditor or accountant.
