Goodwill & Share Valuation

Goodwill: ¯úk©bxq ¯’vqx m¤ú` ev g~jabx m¤ú`mg~n wewb‡qvM K‡i ¯^vfvweK gybvdv †_‡K AwZwi³ gybvdv AR©‡bi †h ÿgZv
Zv‡K mybvg e‡j| AviI mnRfv‡e ejv hvq ‡h, †Kvb cÖwZôv‡bi ¯^vfvweK gybvdvi †P‡q AwZwi³ gybvdv AR©‡bi ÿgZvB nj mybvg|
cÖKvi‡f`: `yB cÖKvi;
1. Purchase Goodwill : ‡Kvb Kvievi µ‡qi mgq Kviev‡ii `v‡gi †P‡q †ewk `v‡g µq Kiv‡K eySvq|
2. Inherent or non-purchased Goodwill : µqK…Z mybv‡gi AwZwi³ ev wfbœ mybvg‡K eySvq|
Method of Goodwill valuation:
i) Capitalization Method
ii) Super Profit Method
Super Profit: `ywU GKB iKg e¨emv cÖwZôv‡bi g‡a¨hw` GKUv cÖwZôvb †ewk gybvdv AR©b K‡i Zvn‡j †mUv nj Super Profit. hZUzKz †ewk gybvdv AR©b
Ki‡e †mUvB Super Profit.

Steps of Super Profit method:

1. Capital Employed
2. Average Capital Employed
3. Average Maintainable Profit
4. Normal Profit
5. Super Profit
6. Goodwill

Step 1: Capital Employed Step 3: Average Maintainable Profit

Fixed Assets Average Profit
+Goodwill at cost +Interest on debenture
+ trading Investment + Over depreciation on decreasing value
+ Stock + Unadjusted Income
+ Accounts Receivable - Interest on non-trading investment
+ Cash - Under Depreciation on increasing value
- (Goodwill, Non trading Investment, - Unadjusted Expense
Fictitious Assets)
- Current Liabilities i. e
(Accounts Payable, Bank Overdraft,
Provision For taxation)

Step 2: Average Capital Employed

Step 4: Normal Profit
Capital Employed
= Average Capital Employed × NRR
-1/2 of the current year profi:
Current Year Profit
Step 5 : Super Profit
+Interest on debenture
= Average Maintainable Profit- Normal Profit
+ Over depreciation on decreasing value
+ Unadjusted Income
Step 6: Goodwill= Super Profit× No. of years of purchase
- Interest on non-trading investment
- Under Depreciation on increasing value
- Unadjusted Expense
Problem 1: The following of the balance sheet as on December 31, 2012
Assets Tk. Liabilities Tk.
Debtors 50,000 Share Capital:
Stock 1,50,000 20,000 Share of Tk. 10 each 2,00,000
Plant 1,00,000 General reserve 60,000
Factory Premises 1,50,000 Profit & Loss A/C 35,000
Bank Overdraft 30,000
Creditors 40,000
Provision for Taxation 85,000
4,50,000
4,50,000
Additional Information;
1. Net profits of the company for the last 5 years before providing for taxation were Tk. 41,000, Tk. 60,000, Tk. 70,000,
Tk. 85,000, Tk. 90,000.
2. Managerial remuneration of Tk. 4,000 has been charged for each year.
3. The market value of the assets were as follows: stock Tk. 1,55,000, Plant Tk. 1,04,000, Factory Premises Tk. 1,85,000.
4. Taxation may be considered at 40%.
5. Goodwill should be value at 2 years purchase of super profits.
6. Normal rate of return 10%.

Problem 2: The following is the Balance Sheet of Toshin Ltd. At December 31,2012
Assets Tk. Liabilities Tk.
Land & Building 1,50,000 Creditors 80,000
Plant 1,00,000 Reserve 50,000
Investment 55,000 Capital 4,50,000
Stock
75,000
Debtors
Cash at Bank 1,20,000
80,000

5,80,000 5,80,000
The net profit of the firm for the years as follows:
2010 Tk. 80,000
2011 Tk. 1,00,00
2012 Tk. 1,20,00
The above profit include an income on account of interest on investment Tk. 5,000 each year.
Asertain the goodwill of the firm at 2 years purchase of the average super profits for 3 years
taking into accounts the fact that the standard rate of return on capital employed is 10%

Problem3: The information given below related to Jamuna Company Ltd.

Total Assets: Tk. 60,00,000 which include the following: Tk.
Goodwill 5,00,000
Preliminary Expenses 2,00,000
Investments (Total) 12,00,000
Cash 1,00,000
Market value of investments amounts to Tk. 15,00,000 and that investments include Tk. 2,50,000 representing idle fund.
The Current Liabilities of the company amount to 11,00,000
Long Term Loan 5,00,000
Debentures 10,00,000
Reserve 2,50,000
The company’s net profit during the last three years were:
2010 3,50,000
2009 2,75,000
2008 1,00,000
Normal rate of expectation from similar company 15%
Find out the value of Goodwill of the company. Make reasonable assumptions where necessary.
Problem 4: The net profit of the business after tax for the past five years are: Tk. 2,12,500, Tk. 2,30,000 Tk. 2,00,000 Tk. 2,12,000 Tk.
2,30,500. The capital employed in the business is Tk. 20,00,000. The normal rate of return expected is @ 10%. It is expected that the
company will be able to maintain its super profit for the next 5 years. Calculate the value of goodwill on the basis of capitalization of
super profit method.

Valuation of Share: ‡kqvi g~j¨vq‡bi 3wU c×wZ Av‡Q; h_v-

1. Net Assets method or Intrinsic method
Value per equity share = Net Assets/ No. of Equity Shares
Net Assets = Total Assets – Fictitious Assets – Outside Liabilities including debenture
2. Yield valuation method: Profit base & Dividend base
Dividend base market value per share = (Expected dividend rate/ NRR) × Paid up value per share
3. Fair value method.

Problem 5: Following is the balance sheet of Kakoli Ltd. On 31.12.2010:

Liabilities Tk. Assets Tk.
6% Preference Share (1000×Tk. 100) 1,00,000 Goodwill 10,000
Ordinary Share (5,000×Tk. 100) 5,00,000 Buildings 60,000
Reserve Fund 50,000 Machinery 3,50,000
Sundry Creditors 40,000 Stock 1,20,000
Profit & Loss A/C 20,000 Debtors 1,60,000
Other Liabilities 10,000 Cash at Bank 10,000
Preliminary Expenses 10,000
7,20,000 7,20,000
Goodwill is valued at Tk. 31,000. The value of Machinery and Stock is taken Tk. 3,25,000 and Tk.1,40,000 respectively. Value of Building
is reduced by Tk. 10,000. Debtors are expected to realize at 90% of book value. Find out the value of Ordinary Share.

Problem 6: From the following information relating to a company calculate the value of its Equity Share:
Issued Equity Share Capital: 20,000 shares of Tk. 10 each. Paid up Equity Share Capital: Tk. 8 per share
6% Preference Share Capital: 2,00,000 shares of Tk. 10 each fully paid. Expected Profit before tax: Tk. 4,00,000, Rate of tax: 50%, Annual
transfer to General Reserve @ 20%. Normal Rate of return: 20%.

Problem 7: The following is the Balance Sheet of City Ltd. As at December 31, 2012
Assets Tk. Liabilities Tk.
Plant & Machinery 75,000 12,000 Shares of Tk. 10 each fully paid up 1,20,000
Land & Building 45,000 Reserve (General) 20,000
Stock 25,000 Tax Reserve 30,000
Trade Mark 20,000 Employees Savings A/C 25,000
Debtors 45,000 Creditors 40,000
Preliminary Expenses 15,000 Profit & Loss A/C 15,000
Cash at Bank 25,000
2,50,000 2,50,000
Land & Building have been valued at Tk. 1,15,000 and Plant & Machinery is worth Tk. 65,000 Tk. 5,000 of the bad debts are
Bad. The profit of the company have been as follows:
Year 2010……Tk. 45,000 , 2011…..Tk. 50,000 , 2012…….Tk. 45,000 respectively.
It is the company’s practice to transfer 20% of the profit to reserve. Ignoring taxation find out the value of Shares on the Yield
and Net Assets basis. Similar company gives a yield of 15% on the market value of their shares. Goodwill may be taken to be
Worth Tk. 1,00,000.
Problem 8: The following is the balance sheet of ABC company Ltd. As at June 30, 2012
Assets Tk. Liabilities Tk.
Buildings 1,70,000 5,000 Pref. Share Tk 20 1,00,000
Machinery 1,65,000 1,000 Ordinary Shares Tk. 200 2,00,000
Motor Car 75,000 Reserve Fund 60,000
Goodwill 30,000 Profit & Loss A/C 20,000
Current Assets 1,40,000 Current liabilities 2,00,000
5,80,000 5,80,000
On June 30, 2012 the Assets were revealed as follows:
Buildings Tk. 2,00,000 Machinery Tk. 1,55,000 and Motor Car Tk. 65,000. The Company earned profits after depreciation and taxation as
follows: Year 2010…Tk. 60,000, Year 2011.Tk. 70,000, Year 2012…Tk. 80,000. The valuation of Goodwill is to be based on 2 years
purchase of supper profit. It is considered that 10% is a reasonable return on Net Tangible Assets.
Compute the value of the Goodwill of the company and also ascertain the value of each Ordinary Share & each Preference Shares.

Problem 9: From the following Balance Sheet and other information given below find out the fair value of each equity share taking
Into consideration a reasonable amount of Goodwill.
Liabilities Tk. Assets Tk.
Equity Share of Tk. 5 each 4,00,000 Goodwill 75,000
6% Pref. Sh. Of Tk. 100 each 1,50,000 Plant and Machinery 3,75,000
General Reserve 2,00,000 Buildings 2,25,000
5% Debenture 75,000 Inventory 2,50,000
Profit and Loss A/C Accounts Receivable 3,50,000
Balance 01.01.2003 = 50,000
Profit for 2003 = 4,50,000
5,00,000
Accounts Payable 50,000 Preliminary Expenses 15,000
Cash at Bank 85,000
13,75,000 13,75,000
1. The company’s prospects of profit for 2004 are equally good.
2. The dividend on Preference Shares for 2003 was not paid.
3. The present value of Plant and Machinery and Buildings are 20% and 15% higher than the book value.
4. Companies doing similar business show a profit of 15% on market value of shares.
5. Profits for the past three years have shown an increase of Tk. 50,000 annually.
6. Make necessary assumptions.

Problem 10: Jamuna Company Ltd. has Authorized and Paid Up Capital of Tk. 10,00,000 Tk. 100 per share. The total
Assets of the company at its price were Tk. 45,00,000 and the Outside Liabilities were Tk. 16,00,000. The company
during the last five years earned profit: Tk. 5,80,000, Tk.6,15,000, Tk. 5,75,000, Tk. 7,00,000 and Tk. 6,25,000.
The Normal Rate of Return expected in future is 12%. The company during the last five years declared dividend at the
rates 15%, 17%,18%,20%,20%. Find out the Fair Value of Share taking into consideration the value of Goodwill at 3 years
purchase of Super Profit. Ignore Taxation.