Factors Affecting Valuation of Shares

11/07/2020 3 By indiafreenotes

The factors affecting the value of shares can be summarized as under:

  1. The nature of the business
  2. The income yielding capacity of the company
  3. The demand and supply of shares
  4. The percentage of dividend declared on shares
  5. The availability of sufficient assets over liabilities
  6. General economic condition e.g. availability of raw materials, possibility of new competitions.
  7. Financial, political and other factors affecting the business
  8. Reserves of the company

Assumptions of Share Valuation:

While valuing the shares an accountant is to depend on the following assumptions:

(i) Sufficient number of buyers and sellers of the share are available in the market;

(ii) The seller does not sell his shares due to his urgent need; and

(iii) The purchaser of the shares does not like to pay a higher price in comparison with the reasonable price or market price of the shares.

Valuation of shares should be meaningful provided the above assumptions are satisfied. Practically, valuation of unquoted shares is very difficult although the same task can be done on the basis of past decisions of different leading cases and related surroundings. It should be remembered in this respect that the price of shares of a company which is quoted in the Stock Exchange may not be at par in comparison with the real financial position of the company.

Because, there are certain external factors (i.e., the demand and supply of shares, rate of bank interest, tax-policy of the government, political conditions etc.) which influence the value of shares. Under the circumstances, the valuation of such shares may be made necessary even if the same are quoted in the Stock Exchange (i.e. in the case of Amalgamation or Absorption).

Factors Affecting the Value of Shares:

The value of a share is greatly affected by the economic, political and social factors such as:

(i) The nature of the company’s business

(ii) The economic conditions of the country

(iii) Other political and economic factors (e.g., possibility of nationalisation, excise duty on goods produced etc.)

(iv) The demand and supply of shares

(v) Proportion of liabilities and capital

(vi) Rate of proposed dividend and past profit of the company (vii) Yield of other related shares of the Stock Exchange etc.

Need for Share Valuation:

The necessity for valuation of a share arises in the following circumstances:

(i) For Estate Duty and Wealth Tax purposes

(ii) For Amalgamation and Absorption schemes

(iii) For Gift Tax purposes

(iv) For discharge of debts and liabilities, in exceptional nature

(v) Purchasing shares for control

(vi) For selling shares of a shareholder to a purchaser (which are not quoted in the Stock Exchange)

(vii) For the conversion of one class of share to another class

(viii) For the compensation made to a company when the said company is being nationalised

(ix) For granting loans on the basis of security of shares (i.e. when the shares are held as security, etc.).