The valuation of businesses and shares for the fixation of exchange ratios of the securities of the transferor and the transferee companies in corporate restructuring scheme is the foundation on which it stands.
Valuation can turn out to be a very contentious issue in corporate reorganization over which protracted Court battles have been fought.
Valuation of a business can either be asset or earnings based.
While in asset-based valuation the net asset value or asset cover of the company is taken, the capitalized value of its income stream at market rate is adopted for earnings based valuation.
Asset cover is the security cushion against shares. In asset based valuation the break up value of the assets is taken. The assets and liabilities are revalued first. Then the net asset is found out after deducting the outside liabilities from the assets.
Net Asset= Realizable Assets--- Outside Liabilities = (Share Capital + Reserves and Surplus---Accumulated
Miscellaneous Expenses and Losses not yet written off) + (Profit on revaluation ----Loss on Revaluation)
The net asset less paid up value of Preference Share Capital, which has preferential right to dividend and preferential right to repayment of capital in winding up of the company, represents net assets available for equity shareholders. The aforesaid divided by the number of equity shares is the value of each equity share.
