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# How is Net Value calculated, and what are the formulae utilised? ## 1. The Revised Codes stipulate that:

1.1. Net Value must be valued as the lesser of two formulae.

1.2. Formula A is a step function with a target of transferring 25% of unencumbered Equity Value (Deemed Value) to black shareholders by the end of the eight-year The sub-minimum of 40% applies to this step function.

1.4. Formula A is calculated as follows:

A = B ×425% × C × 8

Where:

A = is the Net Value Transfer score

B = is the Deemed Value for all black participants in the Measured Entity using the Deemed Value formula above

C = is the Time Base Graduation Factor of the Economic Interest compliance shown above

## 2. Calculation of Deemed Value

2.1. Deemed Value is a key input into the Net Value Transfer Calculation.  Deemed Value is calculated as follows:

A = (B – C)/D

Where:

A = Net Value in the hands of black shareholders

B = The value of Equity Instruments in the hands of black shareholders on the date of measurement

C = The carrying value of any acquisition debts of the relevant black shareholders on the date of measurement

D = The value of the Measured Entity on the date of measurement

2.1.1. The measurement of any acquisition debts is normally quite simple given that they most often take the form of a loan or preference share that has an objective value attached to it.

2.1.2. The measurement of the value of Equity Instruments is more difficult, especially in the case of private companies.  In the case of public companies, assuming there are no additional restrictions or encumbrances on the shares held by black shareholders, then the market price of the shares may be used for the purpose of measuring the value of Equity Instruments in the hands of black shareholders.

2.1.3. For private companies, the Revised Codes state that the value of the Equity Instruments in the hands of black shareholders and the value of the Measured Entity must be undertaken by a Competent Person using a Standard Valuation Methodology.

2.2. Formula B calculates the Economic Interest or amount of equity held by black shareholders.  It is defined as:

A = B/C × 8

Where:

A = is the Net Value Transfer score

B = is the percentage Economic Interest in the Measured Entity of black participants

C = is the target for the Ownership indicator for Net Value Transfer (currently 25%)

2.2.1. For example, if at the end of year one black shareholder held 5% of the Economic Interest, the Measured Entity would achieve:

5/25 × 8 = 1.6

2.2.2. This is below the sub-minimum even though it is over the 2.5% target required under the first formula.  The entity would, therefore, be discounted one BEE Recognition Level as this would be the lower score of the two formulae.