Net Asset Method – Procedure & Calculation

Introduction

Also known as Intrinsic Value Method, Asset Backing Method, or Break-up Value Method. It calculates what equity shareholders would get if the company were liquidated today.

1. Steps for Calculation

Step 1: Calculate Net Assets Available for Equity Shareholders

• Add: Realizable Value of All Assets (including Goodwill, Non-Trade Investments).
  • Exclude: Fictitious Assets (Prelim Exp, Accum Losses).
• Less: Outside Liabilities (Creditors, Loans, Debentures).
• Less: Preference Share Capital (and Arrears of Pref Dividend).

Step 2: Formula

Value per Equity Share = Net Assets for Equity / Number of Equity Shares

2. Important Adjustments

1. Goodwill: Include at Market Value (even if not in books).
2. Investments: Include at Market Value.
3. Contingent Liability: If now likely to pay, Deduct it.
4. Tax Provision: Deduct actual liability.

Illustration

Balance Sheet:

• Assets: 10,00,000 (Market Value 12,00,000). (Incl Fictitious 50k).
• Liabilities: 3,00,000.
• Preference Capital: 2,00,000.
• Equity Capital: 50,000 shares of ₹10 each (5,00,000).

Calculation:

1. Total Assets (Market Value): 12,00,000.
   • Subtract Fictitious Assets if included in market value? No, market value is usually of tangible/realizable assets. Assume 12L is realizable.
2. Less Liabilities: (3,00,000).
3. Net Assets: 9,00,000.
4. Less Preference Capital: (2,00,000).
5. Available for Equity: 7,00,000.
6. Value per Share: 7,00,000 / 50,000 = ₹14.

Exam Notes: Writing the Answer

Question: "How to deal with Partly Paid Shares?"

Answer:

1. Notional Call: Assume the unpaid amount is called up and received. Add this to Net Assets.
2. Divide by Total Number of Shares.
3. Deduct Unpaid Call from the calculated value for the specific partly paid shares.

Summary

• Focus: Realizable value of assets.
• Exclusions: Fictitious Assets.
• Ductions: Third Party Liab + Preference Capital.

Quiz Time! 🎯

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