Illustration 4.

Intrinsic Value of each Equity Share computed afier making assumption regarding goodwill
The following particulars are available in relation to A Ltd. :

518
Equity Shares of ? 20 cach each
Capital : 5,000 Shares of ? 100
1. Equity Share 8% Prceference
Share Capitanl: 1,000, 730,000
2. Preference ?18,000
3. Reserves
4. Current Liabilities Z12,000
of Fixed Assets
$S.Loss on Revaluation ?30,000
6. Average
Trading Profits (afler tax) 10%
Employcd
Nomal Rate of Return on Capital IC.U. B.Com. (Hons.) Part-ll, 2005)
7. Equity Share.
Calculate Intrinsic Value per
Please note that illustrated.
the preceding problem
Apparently this problem is similar in all respects to
1.
in both the problems. In the preceding problem such profits are
2. The average trading profits are given value has
out the Eaming Capacity Value of Shares. Here, only computation of intrinsic
utilised to find this problem.
average profits seems to be useless in
been asked for. So, the mention of
Super Profits and goodwill.
3. Such profits may also be used to find outline.
that
The following solution is being made on
Solution :
Computation of Intrinsic Value of each Equity Share of A Ltd.
Amount Amount
Particulars

A. Calculation of Capital Emplayed

Share Capital :
Equity Share Capital [5,000 x 20] 1,00,000
8% Preference Share Capital [1,000 x 100] 1,00,000 2,00,000
Reserves 30,000
2,30,000
Less : Loss on Revaluation of Fixed Assets 12,000
Capital Employed 2,18,000
B. Valuation of Goodwill
Average Trading Profits after Tax 30,000
Less: Normal Retun on Capital Employed or [10% of 2,18,000] 21,800
Super Profits 8,200
Goodwill= Say 5 times of Super Profits or (5 x 8,200) 41,000
C. Valuation of Shares
Capital Employed (Excluding Goodwill) 2,18,000
Add: Goodwill
41,000
Less : Preference Share Capital 2,59,000
1,00,000
Net Assets for Equity Shareholders 1,59,000
.:. Intrinsic Value per Equity Share = NelASSels Available for Equity Shareholders
No. of Equity Shares
? 1,59,000
5,000 31.80
520 CORPORATE ACCoUNTING
llustration 6.
The following particulars are available in relation to X Ltd :
1. Capital : 450, 6% Preterence Shares of R 100 cach fully paid and 4,500 Equity Shares of
10 cach tully paid.
2, Extemal Liabilities : 7,500
3. Reserve and Surplus R3,500
4. The average expected profit (after taxation) carned by the company ? 8,500.
S. The nomal profit earned on the market value of Equity Shares (fully paid) of the same type of
companies is 9%.
6. 10% of the net profits after tax is transferred to Reserves.
Calculate the intrinsie value per equity share and the value per share according to dividend yield
basis. ASsume that out of total assets, assets worth 350 are fictitious. (C.S. (Inter)]
Solution :
1. Calculation of Intrinsic Value of Equity Shares
Calculation of Net Assets Capital Employed
Particulars Amount Amount
Preference Share Capital [450 x ? 100] 45,000
Equity Share Capital [4,500 x 10] 45,000
Reserves and Surplus 3,500 93,500
Less : Fictitious Assets
350
Net Assets / Capital Employed 93,150
Less : Preference Share Capital
45,000
Assets available for Equity Shareholders 48,150
.. Intrinsic value of each equity share Assets available for Equity Shareholders 48,150 =710.70
Number of Equity Shares -

4,500
2. Calculation of value of each Equity Share on Dividend Yield Basis
Particulars Amount

Average Profits after tax

Less: Transfer to Reserves (as instructed) [10% of 8,500
8,500] 850
Less : Preference Dividend [6% of 45,000) 7,650
2,700
Profit available to Equity Shareholders 4,950
Expected Rate of Equity Dividend = Available Profits R4,950
Paid-up Capital 45,000 100=11%
.. Yield Value of each share = Expected Rate of Dividend x Paid
Normal Rate of Return up value of each equity share

1e x*10=1222
9%
VALUATION OF SHARES 521
Illustration 7.
Valuation on Price-Earning Ratio basis
The Capital structure of a company is as follows :
5,00,000
12% Preference Shares of 10 each
Equity Shares of 100 each 9,00,000
3,50,000
Reserves & Surplus
10% Debentures 6,50,000
13% Term Loan 12,00,000
The average annual profit of the company before payment of interest and income-tax is 7.22.000.
The income-taX rate is 34%.
Calculate the value of Equity Share of the Company assuming that the Price-Earnings Ratio is 12.
IC.U. B.Com. (Hons.) Part-II, 2003/
Solution:
Valuation of Equity Shares of .. Co. Ltd.
Amount Amount
Particulars

A. Calculation of Average Annual Profits available for Equity Shareholders

Average Profits (as given) 7,22,000
Less : Interest on Debentures [@ 10%] 65,000
Interest on Term Loan [@ 13%) 1,56,000 2,21,000
5,01,000
Less: Income Tax @ 34% of 5,01,000 1,70,340
Divisible Profits 3,30,660
Less : Preference Dividend @ 12% 60,000
Profits Available for Equity Shareholders 2,70,660
B. Earning per Share
Profits Available to Equity Shareholders Z2,70,600 3.007 or 3 3
No. of Equity Shares 90,000
.:. Market Value of Each Equity Share = Earnings per Share x Price Earning Ratio
= 3>x 12 36
 Illustration 11.
Computation of Intrinsic Value only
books of Nycil Ltd. as on 31.3.2015:
The following balances appeared in the
Debits Amount Credits Amount

1,50,000 Sundry Creditors 60,000

Fixed Assets at cost
90.000 6% Debentures 37,500
Investments (Market Value 84,000)
1,35,000 Balance in Profit and Loss 13,500
Stock
Investment Fluctuation Reserve 7,500
Sundry Debtors 90,000
Cash at Bank 7,500 Depreciation Fund 30,000
Workmen's Compensation Fund 11,250
Debenture Redemption Fund 15.000
Employee's Provident Fund 18,750
Workmen's Savings Account 30,000
Dividend Equalisation Reserve 9,000
3,750 8% Preference Shares of 10 each 37,500
15,000 Equity Shares of 10 each 1.50,000
General Reserve 52,500

4,72,500 4.72,500
The debenture interest is outstanding for 6 months and Preference Dividend is due for I year ano
none of these have been provided for. Depreciation Fund has been excess created to the tune of ? 1,0
Out of Book Debts 3,750 should be considered unrealisable. A claim for compensation to an employe
has been admitted at ? 1,875.
Calculate the intrinsic value of each equity share. /Bombay University, B. Com. Modificdl
VALUATION OF SHARES
527
Solution:
1. Computation of Intrinsic Value of Equity Shares
Particulars Amount Amount
Total Assets :
Fixed Assets at Cost
1,50,000
Investments (Revalued at Market Value) 84,000
Stock 1,35,000
Sundry Detbtors (90,000 - 3,750) 86,250
Cash at Bank 7,500 4,62,750
Less: Depreciation Fund (30,000- 7,500] 22,500
4,40,250
Less: Liabilities :
(a) External Sundry Creditors 60,000
Debentures 37,500
Intereest Outstanding on Debentures
6
for months 6% of 37,400 x 12 1,125
Empolyees' Providend Fund 18,750
Workmen's Savings Fund 30,000
Compensation to workman [actual amount payable] 1,875 1,49,250
Net Assets 2,91,000
Less: (b) Other Owners Preference Share Capital 37,500
Arrear Preference Dividend @8% [Payable on Liquidation) 3,000 40,500
Net Assets available for Equity Shareholders 2,50,500
Net Assets available for Equity Shareholders
. Intrinsic Value of Each Equity Share No. of Equity Shares
2,50,500 -716.70
15,000

Note: Students are expected to note which assets have been included and which liabilities have not been
deducted for the valuation. They should also note the values considered or ignored.
Illustration 12.
Only yield value- weights imputed considering trend of profits valuations for Minority &
Majority Shareholding
Following information is furnished in respect of Sahana Fibres Ltd.
1. Share Capital : 2,00,000 Equity Shares of 10 each fully paid.
2. Profits after tax, dividends decleared and retained earnings
Year Profits after Tax Dividends Declared Retained Earnings
1996 7,10,000 3,40,000 3,70,000
1995 6,00,000 3,00,000 3,00,000
1994 4,00,000 2,60,000 1,40,000
3. Normal rate of return expected by shareholders in the market is 12%.
4. The normal earnings of similar companies in the fibre industry is 15%.
You are required to calculate the value of shares if (a) Only a few shares are to be sold and
(b) Majority Shares are to sold. |.CWA. (Final))/
528 CORPORATE ACCOUNTINC
Point to be noted:
the valuation under yield basis is based
1. Whenre only a few shares are to be transferred or sold, on
dividend declared /paid in lieu of expected rate of dividend. aclual
For majority shareholders, the expected rate of dividend is considered. Students should remember he
such demarcation is not made under Asset Backing Method.
2. Here the profits exhibit a constant increasing trend. Weights may be assigned giving maximum
to 1996 when the profits are maximum. weightage
Solution:
1. Valuation for Minority Shareholders
Dividends Declared
(a) Calculation of Rates of Dividends Declared = Paid up share capital 100

2,60,000 3,00,000 3,40,000

1994
20, 00,000 = 13%; 1995
20,00,000 100 15%; 1996
20,00, 000 17%
(b) Weighted Average Dividends Declared
Year Rate of Dividend Weights Assumed (w) Weighted Dividend
Declared (D) (DW)
1994 13% 1 13%
1995 15% 2 30%
1996 17% 3 51%
XW = 6 DW = 94%

:. Weighted Average Dividend -- = 15.67%

fWeight Average Dividend x Paid-up value of each Equity Share

(c) .. Yield value of each Equity Share *Normal Rate of Dividend
f15.67% 10|=13.06
*Expected by shareholders in the market.
2. Valuation for Majority Shareholders
(a) Calculation of Weighted Average Profits
Year Profits after Tax (P) Weights (w) Weighted Profit (PW)
1994 4,00,000 1 4,00,000
1995 6,00,000 2 12,00,000
1996 7,10,000 3 21,30,000
ZW = 6 EPW = 37,30,000

Weighted Average Profits [EPW] -

37,30,000
6,21,667
W 6

(b) Expected Rate of Equity Dividend Weighted Average Profits for Equity Shareholders x

Paid up Equity Share Capital

76,21,667
31.08%
20,00,000
VALUATION OF SHARES 529

[Expected Rate of Dividend

Iel: Yield Value of each Equtty Snare =Nomal Rate of Dividend x Paid-up value of each Eq. Share

-
31.08
15 720.72

Illustration 13.
Valuation of Fully paid and Partly paid shares
December, 2015 was as follows :
The Balance Sheet of A Ltd. as on 31st Note As at
Partieulars No.

I. EQUITY AND LIABILITIES

I. Shareholders' Funds
6,00.000
(a) Share Capital 3,00,000
(b) Reserves & Surplus Reserve
2. Current Liabilities
Creditors 2,00,000
(a) Trade Payables Total 11,00,000
II. ASSETS
1. Non-Current Assets
(a) Fixed Assets
() Tangible Assets 2 6,00,000
2. Current Assets
(a) Inventories 2,50,000
(b) Trade Receivables Debtors 2,10,000
(c) Cash and Cash Equivalents Cash at Bank 40,000
Total I1,00,000
Notes to Accounts :

Amount Amount

1. Share Capital
Subscribed & Fully Paid
(a) 9% Preference Shares of 100 each 1,00,000
(b) 30,000 Equity Shares of R 10 each 3,00,000 4,00,000
Subscribed but Partly Paid
(a) 40,000 Equity Shares of 10 each, 5 paid 2,00,000
6,00,000
2. Fixed Assets Tangible Assets
(a) Buildings 2,00,000
(b) Plant and Machinery 4,00,000
6,00,000
Profits and dividends in last several years were as under:
Year Profits Equity Dividend
?.
2012 4 3,20,000 18%
2013 2,50,000 15%
2014 2,20,000 12%
 530 CORPORATE ACcoUNTING
4,00,000. Managerial remuneration is ikely to go up by20 000 Per
Land and Buildings are worth in the same induste
annum. Income Tax may be provided at 50%. Equity Shares o1 companies
dividend rate of 109% are quoted at par.
that :
Find the most appropriate value of acquity share assuming
I Controlling interest is to be transferred.
2. Only a few shares are to be transferred.
lgnore goodwill value, depreciation adjustment for revaluation and need of transfer to Gens.
Reserve
ICA. (Final)j
Solution :
1. Valuation of Shares under Asset Backing Method
Particulars Amount
Amount
Sundry Assets (as per Books) 11,00,000
Add Increase in value of Land &Buildings [4,00,000 - 2,00,000) 2,00,000
Add Notional Calls on Partly paid shares (40,000 Sh. x ?5 each) 2,00,000
Less: Sundry Creditors 15,00,000
2,00,000
9% Preference Share Capital 1,00,000
Net Assets available for Equity Shareholders 3,00,000
(If all the Equity Shares are fully paid) 12,00,000
No. of Fully Paid Shares (30,000 + 40,000 (after Notional Calls)] = 70,000
.. Intrinsic Value of each fully paid share Net Assets available 12,00,000
No. of Shares
-
=17.14
70,000
And same value of a partly paid share =17.14 Call assumed per share ? 5=
Whether a few shares (mínority) are transferred or 12.14
the intrinsic values would be the same. controlling interest (majority shareholding) is transferred,
2. Valuation of Shares by Capitalisation of Profits
(a) If Controlling interest is to be transferred
() Calculation of Average Maintainable Profits (using weights as
theprofits show a constant increasing trend):
Year Profits
Weights Weighted Profits
2012 3,20,000
2913 2,50,000 9,60,000
2
2014 2,20,000 5,00,000
2,20,000
6
16,80,000
Particulars Amount

Weighted Profits 16,80,6 000 2,80,000

Less : Additional amount of Manager's
remuneration 20,000
Less: Transfer for Taxation @ 50% 2,60,000
1,30,000
Less : Preference Dividend [9% of Divisible Profits 1,30,000
1,00,000] 9,000
Maintainable Profits for Equity Shareholders 1,21,004
 531
VALUATION OF SHARES

(ii) Capitalisation of Profits Amount

Partlculars

Maintainable Profits 1,21, 000 x 100

12,10,.000
Profits Capitalised Normal Rate of Aeturn
2,00,000
Add Notional Call on partly paid shares [40,000 x 5) 14,10,000
14,10,000 - 20.14
Value of each fully paid Equity Share 70,000
Share = 20.14 5 =15.14
and value of each partly paid Equity
transterred
(b) only a few shares are to be
= 15%
Average Rate of Equity Dividend
Average Rate of Dividend 15%
Yield Value of each fully paid share Nomal Rate of Dividend 10%

=[15%
,X*5=?7.50
and the same value of each partly paid share
Illustration 14.
denominations
Valuation of fully paid shares of different following balances as on 31.03.2016 :
contained the
The Balance Sheet of La La Ltd. Note As at 31.3.16
Particulars
No.

LIABILITIES
I. EQUITY AND
1. Shareholders' Funds 1 4,12,500
(a) Share Capital 2 92,500
(b) Reserves & Surplus
2. Current Liabilities 50,000
(a) Trade Payables Creditors 5,55,000
Total
II. ASSETS
1. Non-Current Assets
4,00,000
(a) Fixed Assets
1,55,000
2. Current Assets
Total S,55,000

Notes to Accounts :
Amount Amount

I. Share Capital
Subscribed & Fully Paid
(a) 25,000 Equity Shares of 10 each 2,50,000
(b) 15,000 Equity Shares of 7.50 each 1,12,500
50,000 4,12,500
(c) 10,000 Equity Shares of 5 each
2. Reserves and Surplus
(a) Balance in Statement of Profit and Loss Account 97,500
($,000) 92,500
(b) Less : Preliminary Expenses
532 CoRPORATE AccouNTINE
The avverage profits for the tax or reserve) amounted.
last three years (before transfer for
? 1,50,000, 40% and T0% respectively. Fair
Transfer to Reserve may be assumed at
Income Tax andbreak-u) value and vield value of cach kind of Snare.
S T0%, Find out the
Solution :
1. Calculatlon of Break-up Value
Particulars Amount
Fixed Assets 4,1,55,000
00,000
Current Assets
5,550,000
5,000
Less : Extemal Liabilities Shareholders
Net Assets avallable for Equity 5,05,000
Paid-up Equity Share Capital 2,50,000 + 1,12,500 +50,000 =4,12,500
R5,05,000
Net Assset Value per rupee of Paid-up Capital = 74,12,500 =1.23
.
.. Values of different shares are :
12.30
10paid share =10 x 1.23
R7.50 paid share = 77.50 x 1.23 =9.23
= 75 x 1.23 =6.15
75 paid share
2. Calculation of Yield Values

Particulars Amount

Average Profits 1,50,0001

Less: Transfer for Taxation @ 40% 60,00
90,000
Less : Transfer to Reserve @10% 9,000
Profits available for Dividends 81,000

81,000
.. Expected Rate of Dividend = Profit Available for Dividends 4,12,500
100 = 19.64%
Paid up Equity Share Capital
.:. The values are :

For 10 paid share -(1984

10 x 10=*1984

For 7.50 paid share -|9*750=14.73

For 5paid share 19.64 x5|=9.82
Illustration 15.
Valuation of Partly paid Equity Shares, Fulty paid Eguity Shares and Preference Shares
participating or non-participating
The following particulars relate to Titco Ltd. :
VALUATION OF SHARES 533

I 10.000Equity Shares of? 10 ench, fully paid,S,000 Equity Shares of 10 ench, 7paid-up.
) Preference Share Capital: 1,000, 10% Preference Shares of? 100 cach fully paid-up.
3. Reserves 45,000.
4, Creditors 20,000, Bills Payable R 3,000.
further
Besides the above extracts from the Balance Sheet of Titco Ltd. as on 31.12.99, the following
infomation are given to you
to be reduced by 7,000.
L Valuc of fixed asscts to be raiscd by 25,000 whercas stock value is
the books of account.
2, Liability for expenses 6,000 is yet to be recorded in
Titco Ltd.
Calculate value per equity and preference share of
participating and ratio of
When (A) Preterence Shares are non-participating: (B) Preference Shares are
preference is 3 : 2.
participatian in surplus assets between equity and JC.U. B. Com. (Hons.))
Workings Notes :
Rough Balance Sheet of Titco Ltd. as on 31.12.99
Amount Amount
Liabilities Assets

Total Assets 3,03,000

Share Capital :
10,000Eq. Sh. of ? 10each fully paid 1,00,000|(Assumed all realisable-Bal. fig.)
5,000 Eq. Sh. of 10each 7 paid up 35,000
1,000, 10% Pref. Shares of 100 each 1,00,000
Reserves 45,000
Creditors 20,000
Bills Payatble 3,000
3,03,000 3,03,000

Solution :
1. Valuation of Shares of Titco Ltd.
Amount Amount
Particulars

Under Asset Backing Method

Total realisable assets 3,03,000
Add: Increase in value of fixed assets 25,000
3,28,000
Less: Decrease in value of stock 7,000 3,21,000
Less : Liabilities: (External)
Creditors 20,000
Bills Payable 3,000
Unrecorded Liability 6,000 29,000
Net Assets 2,92,000
Less : Paid-up Capital :
Equity Capital [1,00,000 + 35,000) 1,35,000
Preference Capital 1,00,000 2,35,000
Surplus of Net Assets over Paid up Capital 57,000
 CORPORATE AccoUNTING
534

A. Share of Surplus ( Prelerence Shares are participating) Amount

Partlculars

34,200
Equity Shareholders s700 22,800
Preference Shareholders (Paricipating) o1 57,000| 57,000
=?1,69,200
Equity Capital Employed =?1,35,000 +34,200
1,22,800
Preference Capital Employed =?1,00,000 + 22,800 = Capital Employed
Pald-up Capital
For Equity Shares
1,69,200
1,35,000

10
1,69,200
135, 000 <*10-*1259
1,69,200 x7=877
7 1,35,000

Paid-up Capital Capital Employed

For Preference Shares
(Participating)
1,00,000 1,22,800
1,22,800 -x 100 =122.80
100 L100,000

B. If Preference Shares. are not participating shares

Amount
Particulars

Net Assets 2,92,000

Less: 10% Preference Share Capital 1,00,000
Net Assets for Equity Shareholders 1,92,000

For Equity Shares Paid-up Capital Net Assets Value

1,35,000 1,92,000
[1,92,000
10 L1,35,000 x*10=*142
7 1,92,000 x*7=996
1,35,000
For Preference Shares the value should be ? 100 each as such shares cannot share any surplus asS
 535
VALUATION OF SHARES
denominations
the above illustration, the equity shares have been valued as if they are of different
Note : In based on
to the reason that the valuations have been
Notional Calls have not been added. This is mainly due
which might give a different picture it all the shares were fully paid.
surplus of assets
cosidering notional calls, the valuations may also be shown as follows :
However,
For Equity Shares
participating shares
A. I Preference Shares are
Shares 1,69,200
Net Assets available for Equity 15,000
equity shares (5000 x?3]
Add : Notional calls on partly paid 1,84,200

1,84,200 12.28
Value of each fully paid share = 15,000
12.28 - 3 = 9.28
Value of each partly paid share =
non-participating shares
B. I Preference Shares are
Shares 1,92,000
Net Assets available for Equity 15,000
Add: Notional calls
2,07,000
72,07,200 x 13.80
Value of each fully paid share = 15,000
13.80 73 = 10.80
Value of each patly paid share = same in each case as already shown, because
these
of each Proference Share would remain the
The value
shares are fully paid.
Illustration 16.
participating shares
Valuation of shares where Preference Shares are 10 each
20,000, 6% Participating Preference Shares of ?
The Share Capital of a company consists of shares are issued and fully paid.
and 30,000 Equity Shares of 10 each. AIl these
participate in a share of the profits to the extent of a
The Preference Shareholders enjoy the right to Equity Shareholders. Any further excess, if left,
further 6% after payment of a dividend of 12% to the
should go to the equity shareholders. 1,00,000. The rates of normal return
is
The normal average profit (after tax) of the company
nominal value of Equity Shares and 99% on
applicable to this type of company is 12% on the classes of shares.
the
participating Preference Shares. Find out the value of each of
Solution :
1. Distrilbution of Profits
Total Pref. Sh. holdersEquity Sh. holders

Total Profits 1,00,000

Less: Pref. Share Dividend @(6% of 2,00,000] 12,000 12,000
88,000
Less: Eq. Share Dividend @[12% of 3,00,000] 36,000
52,000 36,000
Excess Profits
Less: Further Pref. Share Dividend [6% of 2,00,000] 12,000 12,000
40,000
40,000 40,000
Paid to Equity Shareholders
24,000 76,000
536 CORPORATE ACCOUNTINC

2. Valuation of Preference Shares

24,000 12%
Profits avallable
Expected Rate of Preference Dividend = Pald up Capial 2,00, 000

.:. Yield Value of each Pref, Share 12%

9% 10- 133
3. Valuation of Equlty Shares
Profits available 76,000 25.33%
Expected Rate of Equty Dividend Paid up Capltal 3, 00, 000

:. Yield Value of each Equity Share - x*10=21.10

GOODWILL.
VALUATION OF SHARES INCLUDING VALUATION OF
llustration 17.
Valuation of Shares under Assets Backing Method only
share of Haldia Ltd. on the
From the information supplied below compute the value of an equity
'Asset-Backing Method'.
1. The Balance Sheet of Haldia Ltd. as on 31st March, 2016 was
Note As at
Particulars
No.

1. EQUITY AND LIABILITIES

1. Shareholders' Funds
(a) Share Capital 6,60,000
(b) Reserves & Surplus 2 1,20,000
2. Non-Current Liabilities
(a) Long-term Borrowings 9% Debentures of 100 each 60,000
3. Current Liabilities
(a) Trade Payables -Creditors 60,000
Total 9,00,000
II. ASSETS
1. Non-Current Assets
(a) Fixed Assets
) Tangible Assets 3 4,80,000
(b) 10% Non-Current Investments
2. Current Assets 60,000
(a) Inventories Stock
(b) Trade Receivables - Debtors 1,20,000
(c) Cash and Cash Equivalents 30,000
2,10,000
Total 9,00,000
Notes to Accounts :

Amount Amount
1. Share Capital
Subscribed & Fully Paid
(a) 6,000 Equity Shares of 100 each
(b) 10% Preference Shares of ? 100
each 6,00,000
60,000 6,60,000

contd. next pug'

VALUATION OF SHARES 537

Amount Amount

2. Reserves and Surplus I,50,000

Loss
(a) Balance in Statement of Profit and
(30,000) I,20,000
Less : Preliminary Expenses
Assets
3. Fixed Assets Tangible 2,40,000
(a) Land & Buildings
2,40,000 4,80,000
(b) Plant & Machincry
typc of business is around 10% p.a.
2. Fair retum on capital employcd in this
purchase of Super Profits.
3. Goodwill is to be taken of 5 years'
Preliminary Expenses) for the last seven years is
4. Average of the profits (after deduction of
6,000 has been written off every year for the
1,14,000. Preliminary expenses to the extent of
years and the same trend is expected to be
last 7 years. Profit is more or less stable over /C.U. B.Com. (Hons.)/
maintained in near future. lgnore Tax.
Solution:
non-trading assets, investments)
1. Calculation of Trading Capital Employed (excluding
Amount Amount
Particulars

Total Tangible Assets :

Land & Buildings 2,40,000
2,40,000
Plant & Machinery
Sundry Debtors 30,000
Stock 1,20,000
Cash at Bank 1,50,000
Cash in hand 60,000 8,40,000
Less : Current Liabilities : Sundy Creditors 60,000
Trading Capital Employed 7,80,000|
2. Calculation of Goodwill on super profits below :
Amount
Particulars

Average Annual Profits 1,14,000

Add: Preliminary Expenses written off 6,000
(It is not an actual expense but an amortization that should not affect the goodwill)
Add: Interest on Debentures (9% of 60,000) 5,400
1,25,400
Less : Non-Trading Income (Interest on Investments 10% of 60,000] 6,000
Ad]usted Annual Profits 1,19,400
Less : Normal Return on Capital Employed [10% of 7,80,000] 78,000
Super Profits 41,400

.. Goodwill = R41,400 x 5] = 2,07,000

538 CoRPORATE ACCOUNTING

3. Valuation of Shares Amount Amount

Partlculars

Trading Capital Employed (under (1) above) 7,860,00

0,000
Investments in 10% Govt. Securitles
Goodwill (as valued under (2) above] 2,07,000
60,000
10,47,000|
9% Debentures
Less : (a) Long-Tem Liabilities:Shareholders 60,000 1,20,000
to Preference : Preference Share Capital
(b) Liability
Net Assets avallable to Equlty Shareholders 9,27,000
[R9,27,000 =154.50
.. Intrinsic Value of each Equity Share = 6,000