Valuing growth shares

Key points

• Growth shares are a common feature of planning with employment-related securities but how are they valued?
• The Black Scholes formula is used to calculate the theoretical value of European-style options.
• The volatility measure is the standard deviation of the movements of share prices.
• The volatility of private company shares can be considered by reference to those of public companies.
• The volatility of individual stocks in the market can be measured by Beta.
• The values of call options increase in line with two main factors: volatility and the length of the option period.
• There should be an inverse relationship between the time period and the discounts applied to the values of minority holdings in growth shares.

Let’s start with an enigmatic question. Suppose that the entire share capital of a company Deben Winter Fuels Limited has been acquired for £10m in a recent arm’s length transaction and payment was made in cash on completion....