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BUSINESS
17.2 VALUATION OF GOODWILL, SHARES AND

Profits NAV Fully/ Partly Paid Shares)

llustration 12 (Super + :

follows
On 31st March, 2014 the Balance Sheet of Gomati Ltd. was as

Liabilities Assets

Share Capital Land and Buildings 3,00,000

Plant and Machinery 1,72,500
Authorised 20,000 equity 4,50,000
shares of 100 each 20,00,000 Stock
Issued and paid up Sundry Debtors 9,07,500
15,000 equity Shares Cash 20,000
15,00,000 Bank 1,30,000
of R100 each
Valuation of Business For Amalgamation and Merger 229

Less:Calls in arrears
at 20 each 2.000 14,98,000
Profit and Loss Account 1,54,500
Bank Overdraft 32,000
Creditors 1,15,500
Provision for Taxation 67,500
Proposed Dividend 1,12,500

Total 19,80,000 Total 19,80,000

follows
The Net profits of the company after providing for tax were as

Year Ended
1,72,500
31st March, 2014
1,50,000
31st March, 2013
1,87,500
31st March, 2012
1,80,000
31st March, 2011 1,35,000
31st March, 2010
3,75,000 and Plant and Machinery
were
were valued at
On 31st March, 2014 Land and Building valued at 3
Normal rate of Return can be considered at 8%. Goodwill is to be
valued at 2,25,000. based on average profit
of last 5 years.
profits
years purchase of super and partly paid equity
shares.
intrinsic value of fully paid
Findthe Business.
(Oct. 04, April 11, 13, adapted)
Value of
Compute the
Solution
Working
 llustration 13 (Super Profits +NAV+Yield)
Shibhay Ltd. started operations in 2002 with a paid up capital 2,50,000 thousand. Profit aftar s
has been as follows ter tax
Year Ending 31st March in thousands
2010
2011
20,000 (loss) due to long strike
* * *** 44,000
2012 51,500
2013 58,000
2014 65,000
Income-tax so far has been at the average rate of 40% but is likely to be 50% henceforth.
Dividends
were distnbuted @ 10% in 2011 and 2012 and 15% on the
paid up capital in 2013 and 2014.
The market price of the share is125
been ascertained
at year ending 31-3-2014. Profits for the years till 2014 have
after debiting 20,000 thousand as manager's salary
which is to be increased to
* 30,000 thousand w.e.f. 1st April 2014.
The has
company secured a
beneficial
p.a. tor next five years from 1-4-2014.
contract which will fetch an advantage of R 20,000 thousand

You are to ascertain goodwill, considering average capital employed, average

required dividend
normal rate of returm and future maintainable weighted profit by 3 years' super profits method.
Further you also required to ascertain the value of the business and shares under intrinsic and yield
methods, with the following information furnished to you:
Balance Sheet of Shibhay Ltd. on 31st March, 2014

Liabilities 000 Assets 000

Paid up Capital Goodwill at cost 25,000

Shares of 100 each full paid 2,50,000| Land & Buildings 1,10,000

General Reserve 29,150 Plant & Machinery 1,00,000

Profit & Loss Appropnation A/c 27,500 Stock in Trade 1,50,000

Bank Overdraft 28,350 Book Debts less Provision 90,000

Sundry Creditors 90,500

Provision for 1axation 49,500
4,75,000 4,75,000
(Oct. 03, adapted)
Solution:
+ 10 + 15 + 15 50
 232 Corporate FinancialAccounting (M. Com. Part-II : SEM-I) valm
lustration 14: (Super Profits + FVM)
The Balance Sheet
of Suyash Ltd. as on 31-3-2013 is as follows The
Liabilities Assets
Equity Shares of 10 each 5,00,000 Building9 5,00,000
10% Preference Shares of
Machinery 3,00,000
100 each 1,00,000 Stock 60,000
General Reserve 1,00,000 Debtors
Profit & Loss Account 50,000
50,000 Bank
Creditors 50.000
1,10,000
Provision for Income tax 40,000
Proposed Dividend 60,000
9,60,000
9,60,000
The profits of the company after charging depreciation but before
forlast five years; 2009 1,00,000; 2010 income-tax 40% were as foilows
z 1.80.000. Reasonable Return on equity funds1,40,000,
2011
in this line ot
1,60,000; 2012 7 1,70,o00: 2013
business is considered to
(1) Find out the value of an Equity Share be 10%
under
goodwill on the basis of five year's purchase ofthe Net ASset or
Intrinsic Method after valuing
annual super profits
(2) Also, ascertain the Value of Business.
Solution (March 1999, adapted)
A. Computation of Goodwill
Valuation of Business For Amalgamation and Merger 233

lustration 15
TheBalance Sheet of Ramesh Ltd. as on 31st March, 2014 was as follows

Liabilities in lakhs Assets in lakhs

Equity Share Capital of R 10 each 500 Building 220
Profit and Loss Account 103 Machinery 95
Bank Overdraft 2 tocks 350
Creditors 77 Debtors 155
Provision for Tax 45
Proposed Dividend 75
820 820
The net profit of the company after deducting all working charges and providing depreciation and
taxation were as under
Year Ending in lakhs
31-3-2010 85
31-3-2011 96
31-3-2012 90
31-3-2013 100
31-3-2014 95
On 31st March, 2014 Building was valued at 260 lakhs and Machinery at 150 lakhs. The other
assets and liabilities have been correctly valued, In view of the nature of business, it is assumed
that 10% is a reasonable return on tangible capital. Consider Closing capital
as Average Capital
for
Employed and Simple Average computing Average Profit.
Youare required to detormine
(a)Value of Goodwill on the basis of 5 yoars' purchase of super profits.
Sharos
(b)Intrinsic Value of Equity
c) Value of Busines8
(April 10, 12, adapted)
Solution:
 llustration 16:
Exp
The Balance Sheet of Raj Company as at 31-3-2014 was as followS
Liabilities Yie
Assets
Share Capital 2,000 Shares Land and Building
of R 100 each 1,10,000 Fa
General Reserve
2,00,000 Plant and Machinery
1,30,000
40,000 Patents and Trademarks
Profit and Loss A/c 32,000 Stock 20,000
Sundry Creditors 1,28,000 Debtors 48,000
Income Tax 88,000
60,000 Bank Balance
52,000
Preliminary Expenses 12,000 T
4,60,000 fo
4,60,000
Theexpert valued the Land and Building at 2,16,000, Goodwill at 1,60,000 and
Machinery at 1,10,500. Out of the total debtors, it is found that debtors of R
Plant and

The profits of the company have been as 8,000 are bad.

follows
2011-12 80,000
2012-13 90,000
2013-14 1,06,000
Thecompany follows the practise of transferring 25% of
companies earn at 10% of the value of their profits to general reserve. Similar type o
shares.
Ascertain the vale of the company's shares as under:
(a) Intrinsic Value Method
(b) Yield Value Method
(c) Fair Value Method
gnore laxation and depreCiation on revalued assets.
Solution (Oct. 2014, adapted)
Calculation of Intrinsic Value of Equity Shares