NP

40000

42000 400000 10% 44000 44000 40000 4000

45000

46000

47000

Capital employed Rate Avg Profit FMP Exp Profit Super Profit Annuity Method Goodwill Capitalization Method Goodwill Super profit Method GW=Super pf * yrs

15120

1/1.1 + 1/1.1^2 +1/1.1^5 = 3.78 (Time value of money)

40000

0.909091

20000

me value of money)

0.826446 0.751315 0.683013 0.620921 3.790787

1 Adjusted Average Profit Profit as given Less: Over valuation of Cl. Stk Add: Overvaluation of Op. Stk Add: Repairs to be Capitalised Less: Depreciation on Additions Adjusted Average Profit Weights 1981 101,000 1982 124,000 (12,000) 1983 100,000 12,000 80,000 (2,667) 189,333 3 568,000 146,207 1984 150,000

101,000 1 101,000 1,462,067 10 =

112,000 2 224,000

(7,733) 142,267 4 569,067

Average Profit 2 Future Maintanable Profit Average Profit Less / Add : Future Adjustments # Less Cost of Management

146,207 (24,000) 122,207 750,000 12% 90,000 32,207

3 Capital Employed Rate Expected Return 4 Super Profit

5 Goodwill GW = Super profit X Number of years Purchse 96,620 6 Annuity Method SP X PV factor Dividend is a discretionary element

22,223

0.892857

0.797194

0.71178

1 Adjusted Average Profit Profit as given Less: Adjustments Adjusted Average Profit Weights 1981 12,200 12,200 1 12,200 50,200 4 = 1982 15,000 15,000 1 15,000 1983 2,000 2,000 1 2,000 12,550 1984 21,000 21,000 1 21,000

Average Profit 2 Future Maintanable Profit Average Profit Less / Add : Future Adjustments # Less Cost of Management

12,550 (3,600) 8,950 50,000 10% 5,000 3,950

3 Capital Employed Rate Expected Return 4 Super Profit

5 Goodwill GW = Super profit X Number of years Purchse 11,850

NP

322800

272100 1800000 10% 310800 -36000 274800 180000 94800 284400

337500

Capital employed Rate Avg Profit Less Remuneration

Exp Profit Super Profit GW=SP*No of years

1 Average Profit 1981 1982 1983 Average Profit 112500/3 2 Future Maintanable Profit Average Profit Less / Add : Future Adjustments # Less Investment Income 32280 36870 43350 112500 37500

37,500 (1,800) 35,700

3 Capital Employed Capital Add: Reserves Less: Investments

164000 40000 -30000 174,000

4 Average Capital Employed As the question says that the profits ar withdrawan immediately it may mean two things (1) Since the profits are determined at the end of the year, therefore they would be withdrawan also at the end of the year, in which case Average Capital Employed = Closing Capital + 1/2 Profit withdrawan. (2) Profits are earned throughout the year and hence withdrawan also throughout the year, in which case Averag Capital Employed will be same as closing Capital Employed Assuming Option 2 to be correct Average Capital is same as Closing Capital 5 Expected Rate Given as 10% 6 Expected Return = Expected Rate X Average Capital Employed = 10% of 174000 = 17400 7 Super Profits = FMP - Expected Return = 35700-17400 = 18300 8 Goodwill = Super Profits X Number of Years Purchase = 2 X 18300 = 36600

1 Adjusted Average Profit Profit as given Less: Adjustments Adjusted Average Profit Weights 1982 50,000 50,000 1 50,000 165,000 3 = 1983 60,000 60,000 1 60,000 1984 55,000 55,000 1 55,000 55,000

Average Profit 2 Future Maintanable Profit Average Profit Less / Add : Future Adjustments # Less Cost of Management

55,000 (3,000) 52,000 300,000 10% 30,000 22,000

3 Capital Employed Rate Expected Return 4 Super Profit C] Annuity Method Goodwill B] Capitalization Method Goodwill A] Super profit Method GW=Super pf * yrs

83,160

220,000

110,000

1 Average Profit 1980 1981 1982 1983 1984 Average Profit 66100/5 12700 13200 13300 13500 13400 66100 13220

2 Future Maintanable Profit Average Profit Less / Add : Future Adjustments LessCasual Income (100-80) Add Saving in Dep. On M/c. (10% of 1000) Add Saving in Dep. On Fur (10% of 50)

13,220 (20) 100 5 13,305

3 Capital Employed Assets Machinery Furniture Stock Debtors Prepayments Cash Goodwill Total Assets Less: Liabilities Sundry Creditors

17000 450 14500 12500 50 22800 0 67300 -7500 59,800

4 Average Capital Employed Capital Employed - 1/2 Profit Retained 59800 - (13400 X 1/2) = 59800-6700 = 5 Expected Rate Given as 10%

53100

6 Expected Return = Expected Rate X Average Capital Employed = 10% of 53100 = 5310 Plus Directors Remmuneration = 5310+5000 = 10310

7 Super Profits = FMP - Expected Return =13305 - 10310 = 2995 8 Goodwill = Super Profits / Capitalization Rate

=2995/10% =

29950

NP Goodwill adjusted Pref div Equity div Weights Avg Profit Future Adst FMP Capitalized value of FMP Yield method Value per share

1976 28000 10000 0 38000 1 98000 (53,000) 45,000

1977 65000 10000 0 20000 95000 2

1978 110000 10000 0 120000 3

No of shares = 10000; Dividend = Rs1/share

540,216.09

27.01

(Capitalized value/No of equity shares)

Net Asset method Lacs Goodwill Land & Bldg Plant Invt Debtors Inventory Worthless stock Bank bal Total Less CL Bank O/D Pref Share Total Net Worth Value per share Fair Value 0 1 5 0.5 0.7 0.1 0.1 0.3 7.7

0.3 2 1 3.3 4.4 22 24.50540216 4.4 Net Worth/ No of equity shares (Value under YM method + Value under NA method) /2

Dividend = Rs1/share

NP Pref Div Deprn Debtors Debenture interest

1982 80400 -4200 -3000 -1200 72000 80750 80750 161500

1983 92900 -4200 -3000 -1200 84500

1984 89650 -4200 -3000 4500 -1200 85750

Deprn per year = 160000/16 = 10k; provided = 7k; extra adjust Total debtors = 40500/0.9 ; doubtful 0.1 * 45k 6% * 20k

Avg Profit FMP GW=FMP*Years Net Asset Method GW Leasehold prop P&M Debenture Redn Stock Debtors Bank Goods not valued Less Pref Shares Debentures Creditors Omitted creditors

161500 60000 72500 10000 52500 45000 19500 -6000 415000 60000 20000 49750 3750 133500

Net worth Value per share Pref Share Eq shares 60000 168900 228900

281500 28.15

r = 160000/16 = 10k; provided = 7k; extra adjustment = 3k = 40500/0.9 ; doubtful 0.1 * 45k

1 Average Profit Average Profit as Given Less: Preferance Dividend (6% of 550000 Average Profit for Equity Shareholder

75,000 (33,000) 42,000

2 Future Maintanable Profit Average Profit as above 3 Capital Employed Assets Equity Capital Revaluation of Assets

42,000

350,000 70,000 420,000

4 Average Capital Employed Since Details of Dividend payment and Profit retained are not available Average Capital Employed is same as Closing Capital 420,000 5 Expected Rate Given as 8% 6 Expected Return = Expected Rate X Average Capital Employed = 8% of 420000 = 7 Super Profits = FMP - Expected Return =42000-33600 = 8 Goodwill = Super Profits X Number of years purchase =8400 X 5 9 Net Assets Capital Employed by Equity Shareholders, without Goodwill Goodwill as determined above Total Net Worth of Equity Shareholders 10 Value per Share = Net Worth / No. of Eq. Sh 462000/35000

33,600

8,400

42000

420,000 42,000 462,000

13.20

Number of Equity Share that 11 can be acquired = Investment to be made / Price per Share = 33000/13.20

2,500

1 Calculation of Profit Distributed as Dividend 1982 Profit as Given 4.80 Less: Opening Balance of P/L A/c (0.80) Less: Profit Not Distributed (8080), (80-90), (120-90) Profit Distributed 4.00 2 Average Profit Profit Distributed Plus Profit Retained = Profit for the year Less: Post Tax effect of Depreciation (10-9X10%X50%) (11-10X10%X50%), (12.510X10%X50%) Add Post Tax Effect of Increase in Closing Stock Less Post Tax Effect of Increase in Opening Stock Add Transfer to Gen Reserve (Assumed) Add Non Operating loss on account of write off of Goodwill (Not to take post tax effect because GW is not allowed as expenses in Income Tax) Average Profit 3 Capital Employed Land & Building Stock Bebtros & Cash Less Liabilities Closing Capital Employed 4 Average Capital Employed Closing Capital Employed Opening Capital Employed Average of above Add: Half of Profit Disributed (Note - We will ignore 1/2 the profit retained because it is already included in closing capital) Average Capital Employed Average of Average Cap Emp

1983 5.70 (0.80) (0.10) 4.80

1984 6.10 (0.90) (0.30) 4.90

4.00 4.00

4.80 0.10 4.90

4.90 0.30 5.20

(0.05) 0.60

(0.05) 0.55 (0.60)

(0.12) 1.00 (0.55) 1.00

1.00

1.00

5.55 6.6260

1.00 6.80

1.00 7.53

10.00 5.20 1.80 17.00 (3.50) 13.50

11.00 6.10 2.90 20.00 (4.50) 15.50

12.50 8.00 5.20 25.70 (5.50) 20.20

13.50 15.30 14.40

15.50 13.50 14.50

20.20 15.50 17.85

2 16.40 17.8667

2.4 16.90

2.45 20.30

5 Expected Rate Given as 10% 6 Expected Return = Expected Rate X Average Capital Employed = 10% of 1786667 = 178667 7 Super Profits = FMP - Expected Return = 662500-178667 = 183833 8 Goodwill = Super Profits X Number of Years Purchase = 183833 X 4 = 1,935,332 9 Net Assets of the Company Closing Capital Employed without Goodwill Goodwill as determined above Net Worth of the Company 10 Value per Share = Net Worth / No. of Shares Value Per Share

2,020,000 1,935,332 3,955,332

3,955,332 10000 395.53

1 Average Profit Average Profit as Given (before tax) Less Income Tax @ 50% Net Profit after Tax Less Preference Dividend Less Transfer to General Reserve Average Profit for Equity Shareholder 2 Capitalised Value of Profit Average Profit / Capitalised Rate 69200/15% 3 Value per Equity Share Capitalised Value / Number of Shares

218,000 (109,000) 109,000 (18,000) (21,800)

69,200

461,333

9.23

VALUE PER SHARE UNDER CAPITALISATION METHOD 1 Adjusted Average Profit Profit as given Add Abnormal Loss Add Dividend on Preference Shares Add Dividend on Equity Shares Adjusted Average Profit Weights 1982 300,000 45,000 500,000 845,000 1 845,000 3,032,000 8 = 1983 450,000 45,000 500,000 995,000 2 1,990,000 39,400 5 197,000 379,000 1984 (60,000) 99,400

Average Profit 2 Future Maintanable Profit Average Profit Less / Add : Future Adjustments Less: Preference Dividend # Less Additional Depreciation 3 Capitalised Value of FMP @ 10% FMP / Capitalisation Rate 234000/10%

379,000 (45,000) (100,000) 234,000

2,340,000

4 Value per Share under Capitalisation Method = Capitalised Value of FMP /Number of Shares -2340000/50000 VALUE PER SHARE UNDER NET ASSETS METHOD 1 Net Assets from Equity Shareholder point of View Fixed Assets Current Assets Less: Current Liabilities (500000X40%) Less Contingent Liability now payable Less Term Loan IFC Less Preference Shares Less Arrears of Preference Dividend Net Assets for Equity Shareholders 2 Value per Share under Net Assets Method = Net Assets / Number of Shares 6955000/50000 FAIR MARKET VALUE Average under all the above methods Value under Capitalised Value

46.80

6,000,000 2,500,000 (200,000) (300,000) (500,000) (500,000) (45,000) 6,955,000

139.10

46.80

Value under Net Assets Value Fair Value of Shares

139.10 92.95

1 Average Profit Net Profit after Tax 88000 103000 116000 130000 Average Profit 1162000/10 2 Future Maintanable Profit Average Profit after Tax

Weight 1 2 3 4 10

Product 88000 206000 348000 520000 1162000 116,200

116,200 193,667 (20,000) 40,000 213,667 (106,834) 106,834

Av Profit before Tax (116200 X 100 / 60) Less Additional Directors Remmuneration Add Advantage of Future Contract FMP Before Tax Less Income Tax @ 50% FMP After Tax 3 Capital Employed Assets Total Assets Less Goodwill Total Assets Less: Liabilities Bank Overdraft Creditors Provisions Closing Capital Employed

950000 -50000 900000 -116700 -181000 -39000 563,300

OR

Share Capital 500000 P&L 113300 Less GW -50000 563300

4 Average Capital Employed Capital Employed - 1/2 Profit Retained + 1/2 Profit Distributed 563300 + (1/2 X 75000) - (1/2 X (130000-75000)) 563300 + (37500) - (27500)) 573,300 5 Expected Rate Expected Rate based on Average Dividend Average Dividend Paid = (10+10+15+15)/4 = 12.50% Expected Rate Based on Market Value On Dividend of Rs. 15 = the Market Value is Rs. 125 Therefore Expected Rate ? On Rs. 100 (100 X 15)/125 = 12%

15% of 500000 = 75000 27500 37500

5A

5B

6 Expected Return = Expected Rate X Average Capital Employed 6A @ 12.5% X 573300 6B @ 12% X 573300

71662 68796

7A

7 Super Profits @ 12.5% 106834-71662 =

35172

7b

@ 12% 106834-68796 =

38038

8 Goodwill = Super Profits X Number of years purchase 8A 35172 X 3 105516 8B 38038 X 3 114114

Number of years purchase = 5 in the pblm

9 Value of share Net worth = Closing Capital + GW Value=NW/5000

677,414 135.48

00000 = 75000

Principals underline the Valuation of Shares As the question do not specify the method, we 1 will go by the Fair Method Net Asset Mehtod including Goodwill is a Fair Method because Valuation of Goodwill 2 considers profitablity 1 Average Profit 1978 1979 1980 Average Profit 342000 450000 252000 1044000 348000

2 Future Maintanable Profit Average Profit Less / Add : Future Adjustments Add Saving in Directors Remmuneration (108000-18000) Less Additional Depreciation FMP before Tax Less Tax @ 60% FMP after Tax Additional Depreciation Land Building Plant Machinery Difference in Fixed Assets Depreciation @ 10% Old 648,000 540,000 1,188,000 324,000 32,400

348,000 90,000 (32,400) 405,600 (243,360) 162,240 New 792,000 720,000 1,512,000

3 Capital Employed Assets Land & Building Machinery Fittings Current Assets Total Assets Less: Liabilities Sundry Creditors

792000 720000 180000 792000 2484000 -1260000 1,224,000

4 Average Capital Employed Since details are not available Closing Capital is taken as Average Cap 1,224,000 5 Expected Rate Given as 10%

6 Expected Return = Expected Rate X Average Capital Employed = 10% of 1224000 = 122400

7 Super Profits = FMP - Expected Return =162240-122400 = 29840 8 Goodwill = Super Profits X Number of years purchase = 20840 X 3 9 Net Assets Capital Employed without Goodwill Goodwill as determined above

119520

1224000 119520 1343520

10 Value per Share Net Assets / No of Shares 1323520 / 36000

37.32

Net Assets Value without Goodwill Net Assets as Given No. of Shares Value Per Share = Net Assets / No. of Sh

A 2,000,000 100 20,000 Nil

B (900,000) 100

Value under Yield Method Average Profit of A Weight -400000 -500000 600000 200000 Weighted Average Profit Average Profit of B 800000 500000 -100000 -200000 Weighted Average Profit Capitalised Value of Profit = Av Profit / Capitalised Rate Average Profit Capitalised Rate Capitalised Value Value Per Share = Capitalised Value / No. of Sh Weight

8 2 6 4 20

Product (3,200,000) (1,000,000) 3,600,000 800,000 200,000 10,000 Product 6,400,000 1,000,000 (600,000) (800,000) 6,000,000 300,000

8 2 6 4 20

A 10,000 10% 100,000

B 300,000 10% 3,000,000

1,000 A

30,000 B

Fair Value Per Share = Average of Value under Net Assets &Capitalised Value Value under Net Assets Value under Capitalised Value Average Value Advise to the Client

20,000 1,000 10,500

30,000 15,000

1 It is more Appropriate for the client to takeover A instead of B The Investment Required will be Rs. 10.50 lakhs in case of A instead of Rs. 15 lakhs in case of B. Since the investment is lover 2 by allmost 30% so is the risk 3 The Profit on Acquisation will be as follows In case of A = Investment Rs. 10.50 lakhs but Asset Acquired Rs. 20 lakhs thus Capital Profit of Rs. 9.50 lakhs In case of B = Investment Rs. 15 lakhs but Liabiliites Acquired Rs. 9 lakhs thus Capital Loss or payment of Goodwill Rs. 24 lakhs

Hence of differential Competative Advantage to A the In casethe either of the/ Company do not do well then over B will be businesses can be wound up and assets sold- In case of A you will recover your original investment plus make a profit of Rs. 9.5 lakhs, but in case of B Nothing will be available as Net assets are 4 negative A has accumalated Losses of Rs. 9 lakhs which will give futher tax 5 saving in future.

1 Average Profit 1982 1983 1984 Average Profit 135000/3 2 Future Maintanable Profit Average Profit Less / Add : Future Adjustments 40000 45000 50000 135000 45000

45,000 45,000

3 Capital Employed Equity Share Capital General Reserves Profit & Loss Account Profit on Appreciation of Building Capital Employed Average Capital Employed 4 Average Capital Employed As Above 5 Expected Rate Opening P&L Profit for the year Transfer to General Reserve Closing Balance in P/L Account Dividend Distributed Dividend as % of Equity Share Capital Average Dividend = Expected Rate 1982 100000 10000 100000 100000 310000 1983 100000 20000 120000 100000 340000 343,333 1984 100000 30000 150000 100000 380000

343,333 1983 100000 45000 -10000 -120000 15000 15% 12.50% 1984 120000 50000 -10000 -150000 10000 10%

6 Expected Return = Expected Rate X Average Capital Employed = 12.50% of 343,333 7 Super Profits = FMP - Expected Return =45000-42917 = 8 Goodwill = Super Profits X 3 year purchase (Assumed) =2083 X 3

42,917

2,083

6,250

9 Net Assets Capital Employed by Equity Shareholders, without Goodwill Goodwill as determined above

380,000 6,250

Total Net Worth of Equity Shareholders 10 Value per Share = Net Worth / No. of Eq. Sh 386250/10000 11 Value of All the Shares = No. of Shares X Price per Share = 10000 X 38.625

386,250

38.63

386,250

NET ASSET VALUE OF A LTD. Equity Share Capital Share Premium Profit & Loss Account Value of A's interest in B (80%) Dividend Receivable on Shares of B - 80% of Proposed Dividend of B Ltd. Net Asset Value of A Ltd Number of Shares NAV per Share Share to be issued by A Ltd. to C at higher of Rs. 14 or 21.48 = Rs. 21.48 A LTD 800,000 80,000 230,000 1,110,000 568,000 B LTD 500,000 210,000 710,000

640,000 640,000

40,000 1,718,000 80,000 21.48

Number of Shares to be Issued by A = 25% of A's Authorised Capital = 25% of 120000 = 40000 Consideration Payable by C Ltd. to purchase shares of A Ltd. = 40000 X Rs. 21.48

859,000

VALUE OF C LTD. UNDER YIELD METHOD FMP AS GIVEN Less 1/3rd retained for Development Purpose Adjusted FMP 105,000 (35,000) 70,000

Capitalised Value of FMP @ 8% Number of Shares of C Ltd. Value per Share under Yield Method SAY VALUE OF C LTD. UNDER NET ASSETS METHOD Equity Share Capital Profit & Loss Account Profit on Revaluation of Property 750,000 200,000 100,000 1,050,000

875,000 75,000

11.67 12

Number of Shares NAV per Share

75,000 14.00

Share to be issued by C Ltd. to A at higher of Rs. 12 or14 = Rs. 14

Number of Shares to be Issued by C = 25% of C's Authorised Capital = 25% of 100000 = 25000 Consideration Payable by A Ltd. to purchase shares of C Ltd. = 25000 X Rs. 14

350,000

Consideration Payable by C Consideration Payable by A Loan payable by C to A

859,000 350,000 509,000