Page 334 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
Non-Statutory.
(CNO—INTG.100) INVESTIGATION ON BEHALF OF INCOMING PARTNER

(CNO—INTG.110) INVESTIGATION FOR VALUATION OF SHARES IN PRIVATE COMPANIES
Importance of Valuation
- The importance should be given on various purposes for which such a valuation is necessary.
- Different bases on which valuation is possible.
- The variety of economic factors, on a consideration whereof the price so determined needs to be adjusted.

Reason for Valuation
- The necessity for valuation of shares of a private company arises.
- Under the Companies Act, a private company must restrict the transfer of its shares.
- The shares of a private company do not have a free market for determining prices by supply and demand.

Equity Share Valuation Methods
- There are two main methods of valuation for equity shares.
- First method: Value is determined on the basis of net worth of the company.
- In this method, goodwill of the business and non-trading assets are included among assets for net worth.
- Second method: Average profit earned by the business during the preceding 5 to 7 years is considered.
- The value of business is calculated by capitalising it at a reasonable rate of interest.
- Rate of return that an investor expects can be ascertained from similar businesses' share prices on the stock

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