Yield Method Valuation of Equity Share
The yield method calculates the value of an equity share based on the expected dividend yield compared to the normal dividend yield required by investors.
Valuation Formula
The formula used in the yield method is:
$ \text{Value of Equity Share} = \frac{\text{Face Value} \times \text{Expected Rate of Return}}{\text{Normal Rate of Return}} $
Given Information
- Face Value of Share = ₹ 50
- Normal Rate of Return = 10%
- Expected Rate of Return = 5%
Calculation Steps
- Substitute the values into the formula:
$ \text{Value} = \frac{₹ 50 \times 5\%}{10\%} $
- Convert percentages to decimals:
$ \text{Value} = \frac{₹ 50 \times 0.05}{0.10} $
- Calculate the numerator (expected return amount):
$ \text{Value} = \frac{₹ 2.50}{0.10} $
- Divide to find the final value:
$ \text{Value} = ₹ 25 $
Conclusion
Using the yield method, the value of the equity share is determined to be ₹ 25.
Important Questions from Corporate Accounting
In order to compensate the investors, what kind of debentures are issued at substantial discount and the difference between the nominal value and the issue price is treated as the amount of interest related to the duration of the debentures?
If the value of debentures is less than the value of the net asset taken over, then the difference will be credited to:
The part of capital which is called-up only on winding up is called ______.
From which of the following, companies cannot buy its own shares?
In order to compensate the investors, what kind of debentures are issued at substantial discount and the difference between the nominal value and the issue price is treated as the amount of interest related to the duration of the debentures?
