Introduction
The valuation of shares is essential in investment decisions, mergers, acquisitions, and financial reporting. Among the different techniques, the dual method combines two approaches to derive a more balanced and accurate valuation. This method is particularly useful when market data is incomplete or when both dividend potential and asset backing are relevant.
What is the Dual Method of Share Valuation?
The dual method is a combination of:
- Net Asset Value Method (NAV)
- Earnings or Yield-Based Valuation Method
The final value of a share is usually the average of the values obtained from both methods, thus offering a more comprehensive estimate.
1. Net Asset Value (NAV) Method
This method focuses on the company’s balance sheet and estimates the value of shares based on the company’s net assets.
Formula:
Net Asset Value per Share = (Total Assets – Total Liabilities) / Number of Equity Shares
Example:
Total Assets = ₹50,00,000
Total Liabilities = ₹20,00,000
Number of Equity Shares = 30,000
NAV per Share = (50,00,000 – 20,00,000) / 30,000 = ₹100
2. Earnings (Yield) Based Method
This method considers the company’s ability to generate earnings and dividends. It uses expected earnings and a capitalization rate to determine the share value.
Formula:
Value per Share = Expected Earnings per Share / Capitalization Rate
Example:
Expected EPS = ₹12
Capitalization Rate = 10%
Value = ₹12 / 0.10 = ₹120
Combining Both Methods (Dual Method)
Once values from both methods are calculated, the dual method takes the average:
Final Share Value = (NAV + Earnings Value) / 2
In our example:
NAV = ₹100, Earnings Value = ₹120
Dual Method Value = (100 + 120) / 2 = ₹110
Advantages of Dual Method
- Provides a more balanced and comprehensive valuation
- Combines asset-based and performance-based approaches
- Useful in cases where market data is unavailable or not reliable
Limitations
- Subjectivity in determining capitalization rate
- Not suitable for firms with negative earnings or asset disputes
- May not fully reflect future growth potential
Conclusion
The dual method of share valuation offers a reliable and holistic approach by merging the strengths of NAV and earnings-based techniques. It is particularly useful for valuing private companies or in mergers and acquisitions where market prices are not readily available.