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Valuation of Goodwill & Shares – Problem Practice

Introduction

This chapter wraps up the course with advanced problems on Valuation.

Problem 1: Goodwill Valuation (Super Profit)

Question: XYZ Ltd gives the following info:

  • Average Capital Employed: ₹15,00,000.
  • Net Profit for last 3 years: 2,00,000; 2,30,000; 2,60,000.
  • NRR: 12%.
  • Fair Remuneration to Partners (not charged): ₹30,000 p.a.
  • Value Goodwill at 3 years' purchase of Super Profit.

Solution: Super Profit Calculation 💡

Step 1: Calculate Adjusted Average Profit

  • Average of (2.0L + 2.3L + 2.6L) = 6.9L / 3 = 2,30,000.
  • Less: Partners' Remuneration: (30,000).
  • Actual Average Profit: 2,00,000.

Step 2: Calculate Normal Profit

  • Capital Employed: 15,00,000.
  • NRR: 12%.
  • Normal Profit = 15L x 12% = 1,80,000.

Step 3: Calculate Super Profit

  • SP = Actual (2,00,000) - Normal (1,80,000) = 20,000.

Step 4: Goodwill Final Value

  • 20,000 x 3 = 60,000.

Problem 2: Valuation of Shares (Fair Value)

Question: Balance Sheet of Alpha Ltd:

  • Assets: 20,00,000 (Market Value 25,00,000).
  • Liabilities: 5,00,000.
  • Share Capital: 1,00,000 shares of ₹10 each (10,00,000).
  • Avg Profit After Tax: ₹3,00,000.
  • NRR: 15%.
  • Calculate Fair Value of Share.

Solution: Fair Value Calculation 💡

Part A: Intrinsic Value (Net Asset Method)

  1. Assets (Market Value): 25,00,000.
  2. Less Liabilities: (5,00,000).
  3. Net Assets for Equity: 20,00,000.
  4. Value per Share = 20,00,000 / 1,00,000 shares = ₹20.

Part B: Yield Value (Earning Capacity Method)

  1. Rate of Earnings = (PAT / Capital) x 100
    • (3,00,000 / 10,00,000) x 100 = 30%.
  2. Value per Share = (Rate / NRR) x Paid-up Value
    • (30 / 15) x 10 = ₹20.

Part C: Fair Value Conclusion

  • (Intrinsic 20 + Yield 20) / 2 = ₹20. (Coincidence: Here both values matched).

Exam Tips

  1. Investments: In Net Asset Method, always take Market Value of Quoted Investments.
  2. Preference Dividend: In Yield Method, finding "Profit Available for Equity" is the most critical step. Don't forget to minus Pref Dividend!
  3. Fictitious Assets: Never include Preliminary Expenses/Underwriting Commission in "Net Assets".

Quiz Time! 🎯

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