Can 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.
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.
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