SYBAF

Valuation of Shares & Goodwill

When the shares of the company get valued? 1. They are not quoted on stock exchange. 2. When shares of unlisted companies or private company are not freely transferable. 3. In case of amalgamation, absorption, reconstruction or pledge of shares as security of loan. 4. Government want to acquire controlling interest through shares of the company. 5. Wealth Tax purpose.

Method of valuation of Goodwill.

Simple Profit Method 1. Purchase of number of years of simple profits: 2. Capitalisation of Simple profit method. Super Profit Method. 1. Number of years Purchase of super profit method 2. Annuity Method 3. Capitalisation of Super profit 4. Sliding Scale valuation Method. Super Profit = Future Maintainable profit Normal profit.

Steps for calculation of goodwill under super profit method.

Step 1 Calculate FMP [Future Maintainable Profit]: It is average adjusted profit to be computed with the help of information given about the company. It is expected future income of the business which may be continued in future. If nothing is given take average profit as FMP.

Step 2 Calculate Normal Rate of Return NRR = Dividend Per share X 100 Market price per share

Steps for calculation of goodwill under super profit method.

Step 3 Calculate Average Capital Employed.
Average capital employed= (Opening capital + Closing Capital)/2 OR Average capital employed= Opening capital + profit earned during the period. OR Average capital employed= Closing Capital profit earned during the period.

Steps for calculation of goodwill under super profit method.

Step 4 Calculate Normal Profit= Average capital Employed X Normal rate of return.
Step 5 Calculate Super Profit= FMP - Normal Profit. Step 6 Calculate Goodwill = Super profit X no of years purchase.(Number of year purchase method)

OR Goodwill = super profit/NRR (Capitalisation of Super profit method)

Simple Profit Method

Purchase of number of years of simple profits:
Goodwill = Average Future maintainable profit X No of years of Purchase. Example 1: The profits of XYZ for the last 3 years were as follows 2008 ----Rs 50000 2009 ----Rs 80000 2010 ----Rs 20000 Goodwill is valued at 4 years purchase of average profits of last 3 years. Find the value of Goodwill. Ans:
Calculation of Average Profit: (50000+80000+20000)/3=50000 Goodwill= 50000 X 4 = 2, 00,000/-

Capitalisation of Simple profit method.

Goodwill= Capitalised value - Actual Capital Employed Capitalised value is nothing but how capital needs to be employed to earn present level of profit at the normal rate of return. Exp: Average profit is Rs 45,000 and NRR is 10 % and Average capital employed is 2,50,000.

So capitalised value of business:= 45000/10%= 4,50,000/Goodwill= Capitalised value - Actual Capital Employed Goodwill= 4, 50,000 - 2, 50,000= 2, 00,000/-

Example 1.
Profit of XYZ Company for the last 3 years is as follows 2008 ----Rs 50000 2009 ----Rs 80000 2010 ----Rs 20000 NRR is 10 % Actual Capital employed is Rs 10, 00,000/Find Goodwill on the basis of capitalisation of average profits

Super Profit Method.

1.Number of years Purchase of super profit method: The number of years purchase of super profit is nothing but capitalisation of super profit. Certainty of super profit is goes on decreasing as one move into future. Therefore a period of 3 to 5 year may be considered for deciding on the number of years purchase as super profits. Goodwill = Super profit X No of years purchase.

2.Annuity Method
It takes in to account present value of future super profit. If the number of years purchase is 5 and normal rate of return is 10%. Then on the basis of this data, and from annuity table the present value of Rs 1 is determined.

Goodwill= Super profit X Annuity value. 3.Capitalisation of Super profit

Super profit is capitalised on the basis of normal rate of return in order to determine value of goodwill.

Goodwill = Super profit / NRR 4.Sliding Scale valuation Method.

This method takes into consideration the probability distribution attributable with the super profit of the company which may be different for different proportions of profits.

Example: If the amount of Super profit is estimated at Rs 5, 00,000. The value of goodwill determined as under. First 3, 00,000 for 3 years purchase = Rs 9, 00,000 Second 2, 00,000 for 2 years purchase = Rs 4, 00,000 Balance 1, 00,000 for 1 year purchase = Rs 1, 00,000 Value of Goodwill = Rs 14, 00,000

Trade and Non trade investments:

interesting thing about Trade n non Trade Investments is that Trade Investments cannot be traded in open market Generally, but Non Trade Investments are generally traded in open market. If nothing is given assume investment as NON TRADE INVESTMENT Trade investment is an for the purpose of business.

Future Maintainable Profit 1st year Rs 5, 00,000 2nd Year Rs 3, 00,000 3rd Year Rs 8, 00,000
1. In future company expected that they need to employ additional employee for which salary need to be paid as 10000/- per employee per month. Company employed 2 more employee Manager remuneration is increased by Rs 1,00,000 per annum. One manager is removed from his job whose salary was Rs 2,00,000 per annum There was fire in factory in 2nd year due to which there was loss of Rs 1, 50,000 due to fire. There is Non Trade investment with the company on which company earns Rs 15,000 every year. Company has taken new insurance policy for which it needs to pay premium of Rs 50,000 every year.

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