valuation of Goodwill and Share

VALUATION MEANS
VALUATION MEANS:
An estimation of the worth of something, especially one carried out by a professional
valuer.
VALUTION IN TERMS OF ACCOUNTING
In finance, valuation is the process of estimating what something is worth.[1] Items that
are usually valued are a financial asset or liability. Valuations can be done on assets (for
example, investments in marketable securities such as stocks, options, business
enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g.,
bonds issued by a company). Valuations are needed for many reasons such as investment
analysis, capital budgeting, merger and acquisition transactions, financial reporting,
taxable events to determine the proper tax liability, and in litigation.
VALUTION OVERVIEW
Valuation of financial assets is done using one or more of these types of models:
Absolute value models that determine the present value of an asset's expected future cash
flows. These kinds of models take two general forms: multi-period models such as
discounted cash flow models or single-period models such as the Gordon model. These
models rely on mathematics rather than price observation.
Relative value models determine value based on the observation of market prices of
similar assets.
Option pricing models are used for certain types of financial assets (e.g., warrants, put
options, call options, employee stock options, investments with embedded options such
as a callable bond) and are a complex present value model. The most common option
pricing models are the Black–Scholes-Merton models and lattice models.
1

Common terms for the value of an asset or liability are market value, fair value, and
intrinsic value. The meanings of these terms differ. For instance, when an analyst
believes a stock's intrinsic value is greater (less) than its market price, an analyst makes a
"buy" ("sell") recommendation. Moreover, an asset's intrinsic value may be subject to
personal opinion and vary among analysts.
The International Valuation Standards include definitions for common bases of value and
generally accepted practice procedures for valuing assets of all types.
2

GOODWILL
WHAT IS GOODWILL?
Goodwill is excess of purchase price over share of Net Assets (Fair Value) Goodwill is
Intangible Asset Goodwill is Reputation , higher earning of income , etc Goodwill =
Purchase price – FV of Net Assets acquired as on date of purchase
DEFINITION
An intangible asset that arises as a result of the acquisition of one company by another for
a premium value. The value of a company’s brand name, solid customer base, good
customer relations, good employee relations and any patents or proprietary technology
represent goodwill. Goodwill is considered an intangible asset because it is not a physical
asset like buildings or equipment. The goodwill account can be found in the assets
portion of a company's balance sheet.
EXPLANATION OF GOODWILL
The value of goodwill typically arises in an acquisition when one company is purchased
by another company. The amount the acquiring company pays for the target company
over the target’s book value usually accounts for the value of the target’s goodwill. If the
acquiring company pays less than the target’s book value, it gains “negative goodwill,”
meaning that it purchased the company at a bargain in a distress sale.
Goodwill is difficult to price, but it does make a company more valuable. For example, a
company like Coca-Cola (who has been around for decades, makes a wildly popular
product based on a secret formula and is generally positively perceived by the public),
would have a lot of goodwill. A competitor (a small, regional soda company that has only
been in business for five years, has a small customer base, specializes in unusual soda
flavors and recently faced a scandal over a contaminated batch of soda), would have far
less goodwill, or even negative goodwill.
3

Because the components that make up goodwill have subjective values, there is a
substantial risk that a company could overvalue goodwill in an acquisition. This
overvaluation would be bad news for shareholders of the acquiring company, since they
would likely see their share values drop when the company later has to write down
goodwill.
CHARACTERISTIC OF GOODWILL
• It belongs to the category of intangible assets.
• It is a valuable asset.
• It contributes to the earning of excess profits.
• Its value is liable to constant fluctuations.
• Its value is only realised when a business is sold or transferred.
• It is difficult to place an exact value on goodwill and it will always involve expert
judgement.
• There can be effect of personal ability for valuation of goodwill.
WHEN GOODWILL IS VALUED
• When the business is sold as a going concern.
• When the business is amalgamated with another firm.
• When business is converted into private or public company.
• When there is a change in the profit-sharing ratio amongst the existing partners.
• When a new partner is admitted.
• When a partner retires or dies or reconstruction.
4

HOW GOODWILL IS VALUED
There are three methods of valuation of goodwill of the firm;
1. Future Maintainable Profits
2. Super Profits Method
3. No.of Years Purchase Method
4. Capitalisation Method
FUTURE MAINTAINABLE PROFITS
We all know that goodwill is abstract asset. It represents the Future Maintainable Profits
of a business. As is clear from the name itself, Future Maintainable Profits are the profits
that are expected to be earned by the business in the coming future. For calculating the
Future Maintainable Profits of a concern, we should have a look into the profits earned by
that concern in the few previous years say 2,3,4 or 5 years. Its always better to take a
short and recent time period for calculation of Future Maintainable Profits or Adjusted
Average Past Profits.
If a business has been earning the same amount of profits over a few past years with
almost no fluctuations, we can take these past profits as Future Maintainable Profits. But
if there are considerable ups and downs in the results of the business, the Future
Maintainable Profits are calculated on the basis of Average Profits of the few past years.
How to calculate Average Profits:
Average Profits can be calculated by dividing the total of profits of a certain past years by
the number of years. Average Profits can be further categorized into two types: 1) Simple
Average Profits; 2) Weighted Average Profits.
5

How to calculate Simple Average Profits:
Simple average profits are taken as Future Maintainable profits when fluctuations in the
profits are not very large. Simple Average Profits can be calculated by dividing the sum
of profits of the years by number of years. The formula is:
Simple Average Profits = Sum of Profits of given years / Number of years.
For example the profits of company X Ltd. for the last three years are:
Year Profits(in million dollars)
2008..... 20,000
2009..... 20,000
2010..... 35,000
The Average Profits of the company are (20,000+20,000+35,000) / 3 = 25,000
How to calculate Weighted Average Profits
If the Profits of a business concerns show large variations its better to calculate Weighted
Average Profits to represent Future Maintainable profits. For this different weights are
assigned to the profits of different years (more weights are given to recent years). Then
weighted average is a calculated as follow:
6

How to Calculate Trading Profits
which can be earned by everybody having surplus funds. Non-trading income is therefore
deducted from the Adjusted Profits above, to arrive at the “Trading Profits”.
Trading Profits = Adjusted Profits Less Net Non-trading Income
How to Calculate Net Profits After Tax
Finally, income tax should be calculated on the profits arrived at in the above step to
determine the net amount of profit available to the purchaser of Goodwill. To sum up ,
we can say that
FMP = Adjusted Average Trading Profits After Tax.
Weighted Average= Sum of the Product of the profits of a year with respective
weight / Total number of Weights.
7

FMP Method OF Valuation
• No. Of Years Purchase Method
The Future Maintainable Profits determined above indicate the expected future
income of the business per year. Such income may continue for a number of years
in future. The actual value of Goodwill is thus calculated as
Future Maintainable Profits * No. Of Years
SUPER PROFIT METHOD
Super Profits are the profits earned above the normal profits. Under this method Goodwill
is calculated on the basis of Super Profits i.e. the excess of actual profits over the average
profits. For example if the normal rate of return in a particular type of business is 20%
and your investment in the business is $1,000,000 then your normal profits should be $
200,000. But if you earned a net profit of $ 230,000 then this excess of profits earned
over the normal profits i.e. $ 230,000 - $ 200,000= Rs.30,000 are your super profits. For
calculating Goodwill, Super Profits are multiplied by the agreed number of years of
purchase.
Steps for calculating Goodwill under this method are given below:
i) Normal Profits = Capital Invested X Normal rate of return/100
ii) Super Profits = Actual Profits - Normal Profits
iii) Goodwill = Super Profits x No. of years purchased
8

PROBLEM 1
The capital employed as shown by the books of ABC Ltd is $ 50,000,000. And the
normal rate of return is 10 %. Goodwill is to be calculated on the basis of 3 years
puchase of super profits of the last four years. Profits for the last four years are:
Year Profit/Loss ($)
2005 10,000,000
2006 12,250,000
2007 7,450,000
2008 5,400,000
Total profits for the last four years = 10,000,000 + 12,250,000 + 7,450,000 + 5,400,000 =
$35,100,000
Average Profits = 35,100,000 / 4 = $ 8,775,000
Normal Profits = 50,000,000 X 10/100 = $ 5,000,000
Super Profits = Average/ Actual Profits − Normal Profits = 8,775,000 − 5,000,000 = $
3,775,000
Goodwill = 3,775,000 × 3 = $ 11,325,000
9

PROBLEM 2
When the actual profit is more than the expected profit or normal profit of a firm, it is
called ‘Super Profit.’ Under this method goodwill is to be calculate of on the following
Manner:
Goodwill = Super Profit x Number of Years Purchase
CAPITAL EMPLOYED = Rs. 7,30,49,249
Financial YearProduct
2006-07 2,60,40,742.63
2007-08 77,77,726.00
2008-09 1,34,84,208.75
2009-10 2,83,01,883.14
TOTAL 7,56,04,560.00
(Rounded off)
SOLUTION:
Average Profit = Rs. 75604560 /4 = Rs. 1,89,01,140
Normal Profit = Rs. 7,30,49,249x 10/100 = Rs. 73,04,925
Super Profit = Actual/Average Profit - Normal Profit
Super Profit = Rs. 1,89,01,140-Rs. 73,04,925= Rs. 1,15,96,215
Goodwill = Rs. 1,15,96,215 x 3 = Rs. 3,47,88,645
10

CAPITAL EMPLOYED
This is the amount of total funds employed by a business. Capital employed can be
computed on the Asset Basis (Net Asset = Gross Assets – External liabilities), or
Liablities Basis (owner’s Funds such as capital , Reserve etc) from the figures available
in the latest balance sheet of the concern.
Capital employed (Asset basis )
Step Particulars Amt
1.
2.
3.
4.
Assets (Fixed +current )
Less : External Liablities
Net TangibleAssets
Less : Non-Trading Assets
Trading Capital Employed
Less : ½ of Net Profit Earned during year
Average Capital Employed during year.
Xxx
(xxx)
xxx
(xxx)
xxx
(xxx)
xxx
NOTES:
• Net Tangible Assets:
Net Tangible Assets = Fixed Assets + Current Assets - External Liabilities
Average capital employed
• Average for a No. Of years
Average capital = total closing capital employed / no. Of years
• Average capital employed during the year
Average capital = closing capital employed – ½ of profits earned during the year.
Or
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Average capital employed = ( closing + opening ) / 2
Capital employed ( Liabilities basis )
Step Particulars Amt
1.
2.
3.
4.
5.
Share Capital (Equity + preference)
Add : Reserves & Surplus
Capital Reserve (Gain on Revaluation of Net Assets)
Less : Profit & Loss a/c (Dr) balance , if any
Misc. Exp. Not w/o, if any
Loss on revaluation , if any
Net Assets
Less : Goodwill (if appearing in balance sheet)
Tangible Capital Employed
Less : non-trading Assets
Trading Capital Employed
Less : ½ of profit earned during the year
Average Capital Employed
xxx
xxx
xxx
xxx
(xxx)
(xxx)
(xxx)
xxx
(xxx)
xxx
(xxx)
xxx
(xxx)
xxx
Normal Rate of Return
This is the normal yield expected by an investor from investment in a particular industry.
This may be
1. ACTUAL RATE
If the final accounts of all the concerns in an industry are available, the Normal Rate of
Return for that industry would be
Total Profits of all concerns / Total capital employed by all concerns
2. ESTIMATE RATE
12

However, generally the profit & loss accounts (to find out the profits ) and the balance
sheet (to find out the capital employed) of all the concerns in a particular industry may
not be available. In such a case , the Normal Return is estimated by the formula :
Return at zero risk + Addl. Return for business risk + Addl. Return for financial risks
(1) Return at Zero Risk: This refers to the return from a safe investment e.g., the interst
on Bank Deposits, say 10%. This is the mimimum rate expected on investment, by an
investor.
(2) Additional Return for Business Risks: A businessman, however, expects to earn
more than the Bank rate, to cover the risk of busines. Such extra return or 'premium' to
cover business risk, say 2%, is added to the bank rate above, to give the normal rate of
13%. this rate goes up or down with changes in general business condition e.g. boom or
depression. Businesmen expect a higher rate for business involving more risk.
(3) Additional Return for Financial Risks: Financial Risks refer to the risks due to
large amounts borrowed or due to the Capital Gearing policies adopted by concern. If the
concern has huge loans it means that a part of the future profits will be used to pay
interest. Suppose the additional return to cover such financial risks is estimated at 3%, the
normal rate of return would now be 15% (10 + 2 + 3).
NRR for Company
The normal rate of return in the case of limited company can also be estimated on the
basis of the Dividend paid by the company, the normal rate of dividend expected and the
market price of the shares of the company. The formula is :
Normal Rate of Return = Dividend (in Rs)_____ * 100
Market Price of the share
13

Goodwill = Super Profit * Number of years of purchase
SOLVED PROBLEMS
The Balance Sheet of Vishnu Limited, is as follows:
Purchase of Super Profits
Balance Sheet As on 31-12-2001
Liabilities Amt(Rs) Assets Amt(Rs)
Share Capital
Capital Reserve
Profit or Loss
Creditors
Depreciation Fund
Land
Machinery
150000
30000
13000
63000
7500
15000
Goodwill
Land
Machinery
Stock
Debtors 49000
RDD (1500)
Cash and Bank
15000
95000
60000
57500
47500
3500
278500 278500
This Company’s business is to be purchased by Shiv Limited. You are required to value
the goodwill of the company, after taking into account the following information.
14

• The reasonable return on capital employed in the class of business done by the
company is 12%
• The Company’s average profits of the last five years after making provisions for
taxation at 50% amounted to Rs 47500.
• The present market value of Land is Rs 110000.
• The other assets are to be taken at book values.
• The directors of Vishnu Limited (two in number) are to be appointed on the Board
of directors of Shiv Limited. The worth of their services is (and will be in future),
Rs 5000 p.a. for each of the two directors, but no charge has been made regarding
this, against the profits of Vishnu Limited.
• The goodwill of the business of Vishnu Limited is to be taken at four years’
purchase of super profits of the company.
Solution:
15

Step Particulars Amt(Rs) Amt(Rs)
1
2
Profit Before Tax (WN 1)
Less: Directors Remuneration
Adjusted Profit
Less: Tax@50%
Net Profit after Tax(FMP)
Capital Employed
Assets
Land
Machinery
Stock
Debtors
Cash and Bank
Less: Liabilities
Creditors
Depreciation Fund
R.D.D
Capital Employed
(Assets – Liabilities)
95000
10000
85000
42500
110000
60000
57500
49000
3500
63000
22500
1500
42500
280000
87000
193000
16

3
4
5
6
Normal Rate Of return=12%
Normal Profit = 12%*193000
Super Profit= FMP – Normal Profit
= 42500 – 23160
Goodwill =Super Profit * No. of years
purchase
19340*4
23160
19340
77360
Working Notes:
• Average Profit after Tax: In order to calculate FMP we shall have to charge additional
expenditure of directors’ remuneration (5000*2) to profits before tax. Tax rate is 50%
• Additional depreciation in respect of revalued figure of land should be deducted from
FMP. However, this is not considered above since rate of depreciation is not known.
3. CAPITALISATION METHOD:
17

There are two ways of calculating Goodwill under this method:
(i) Capitalisation of Future Maintainable Profit
(ii) Capitalisation of Super Profits Method
• Capitalisation of Future Maintainable Profit.
Such Future Maintainable Profits may be capitalised at the normal rate of return
to arrive at the value of business including Goodwill. The Future Maintainable
Profits are earned by employing all the assets of the business, i.e. the Net
Tangible assets plus the intangible asset, i.e. Goodwill. So, the value of Goodwill
can be found out by deducting the value of the Net Tangible Assets from the total
value of Business.
Valuation of business = FMP*100/Normal Rate of Return
Value of goodwill = Value of business less Net tangible assets
(ii)Capitalisation of Super Profits:
Under this method first of all we calculate the Super Profits and then calculate the capital
needed for earning such super profits on the basis of normal rate of return. This Capital is
the value of our Goodwill . The formula is:-
Goodwill = Super Profits X (100/ Normal Rate of Return)
VALUATION OF SHARES
18

Normally , the value of shares is ascertained from the market price quoted on the stock
exchange. Sometimes, however, share valuation has to be done by an independent valuer.
Shares of a limited company are required to be valued on many occasions such as –
• Sale or purchase of shares of a private limited company whose shares are not
quoted on the stock exchange.
• Sale or purchase of a large number of shares enabling the purchaser to acquire
control of management of the company.
• Sale of the entire company on amalgamation with , or absorption by another
company , or takeover by the Government.
• Conversion of one class of shares into another, e.g. conversion of Preference
Shares into Equity shares.
• Valuation of assets (shares) held by an Investment Company.
• Determination of the liability under the Income-tax Act (regarding the profit on
sale of shares), the wealth- tax Act (regarding the value of investment in shares),
or the gift- tax Act (regarding the value of gifted shares).
• Ascertaining the value of shares offered as security against Loan.
METHODS OF VALUATION
19

The methods of valuation depend on the purpose for which valuation is required.
Generally, there are three methods of valuation of shares:
1. Net Asset Method Of valuation of shares
Under this method, the net value of assets of the company are divided by the number of
shares to arrive at the value of each share. For the determination of net value of assets, it
is necessary to estimate the worth of the assets and liabilities. The goodwill as well as
non-trading assets should also be included in total assets. The following points should be
considered while valuing of shares according to this method:
• Goodwill must be properly valued.
• The fictitious assets such as preliminary expenses, discount on issue of shares
and debentures, accumulated losses etc. should be eliminated.
• The fixed assets should be taken at their realizable value.
• Provision for bad debts, depreciation etc. must be considered.
• All unrecorded assets and liabilities ( if any) should be considered.
• Floating assets should be taken at market value.
• The external liabilities such as sundry creditors, bills payable, loan, debentures
etc. should be deducted from the value of assets for the determination of net
value.
Steps in Net Assets Method
20

Steps Calculation Amt
1
2
3
4
5
Tangible, Real Gross Assets
Less: External Liabilities
Net assets
Less: Preference share capital
Surplus on liquidation
Less: share in surplus of Participating pref. share if any
Net assets available for equity shareholder
(Equity Shareholders Fund)
XXX
(XXX)
XXX
(XXX)
XXX
(XXX)
XXX
The net value of assets, determined so has to be divided by number of equity shares for
finding out the value of share. Thus the value per share can be determined by using the
following
formula:
Value Per Share= (Net Assets-Preference Share Capital)
Number of equity share
Example-
The following information is available from Tina Ltd. as at 31st March, 2009:
21

Capital :
1,000, 5% Preference Shares of Rs. 100 each fully paid Rs. 1,00,000
2,000 Equity Shares of Rs. 100 each fully paid Rs. 2,00,000
Reserve and Surplus Rs. 2,00,000
6% Debentures Rs.1,00,000
Current Liabilities Rs. 1,00,000
Assets: Fixed Assets Rs. 4,00,000
Current Assets Rs. 3,00,000
For the purpose of valuation of shares, fixed assets and current assets are to be
depreciated by 10% ; Interest on debentures is due for six months; preference dividend is
also due for the year. Neither of these has been provided for in the balance sheet.
Calculate the value of each equity share under Net Asset Method.
Solution:
Net Assets Available To Equity Shareholders: Rs
Asstes
Fixed asstes (400000 – 10% of 400000) 360000
Current assets (300000 – 10% of 300000) 270000
Value of Asstes 630000
Less: Liabilities
Current Liabilities 100000
6% Debentures 100000
Add: Interest Outstanding
(Rs 100000*6/100*6/12) 3000
203000
5% Preference Share Capital 100000
22

Add: Arrear Dividend
( Rs 100000 * 5%) 5000
105000
308000
Net Asstes available to Equity Shareholders 322000
No. of equity shares 2000
Value of each share under Net Assets Method:
Value per share = Net Assets available to Equity Shareholders / No. of Equity
Shares = Rs. 3,22,000/ 2,000 = Rs. 161
2. Yield or Market Value Method of Valuation Of Shares
Equity shares may be purchased in a small lot for earning dividends. Such
small lots of equity shares are valued on the basis of expected dividends. If, on the
other hand, equity shares are acquired in a large number the purchaser is more
concerned with the total earning capacity of the company rather than the
dividends paid. In such cases, Equity shares are valued on the basis of the
expected earnings of the company. Thus, valuation of shares on ‘Yield’ basis may
mean either
• Expected Dividend Basis
• Expected Earning Basis
Expected Dividends Basis
23

Expected Dividend Basis may be used for valuation of Equity shares or Preference
Shares.
Yield value per share = Expected rate of dividend * Paid up value of shares
Normal rate of dividend
Expected rate of Dividend = Profit available for equity dividends * 100
Paid up equity capital
Estimating future dividends
Steps Particulars Amt
1.
2.
3.
4.
Future maintainable profits
Add : Non – trading Income
Less : Preference dividend XXX
Expected Transfers to Reserve XXX
Expected Transfers to Fund etc XXX
Expected Earning Available For Appropriation
XXX
XXX
XXX
(XXX)
XXX
PREFERENCE SHARE
Preference shares may also be valued by the Yield Method ( Expected Dividend Basis )
i.e
Expected rate of dividend / Normal rate of dividend * 100
24

The normal rate of dividend in the case of preference shares is generally lower than that
in case of the Equity Shares. This is because, Preference Shares have priority in respect
of capital and dividends.
Expected Earning Basis
Dividend basis of valuation of shares is based on the distribution of profits by way of
dividends in the short run. For valuation of shares under ‘expected earning basis’, the
investor compares the expected rate of earning with the normal rate of earnings.
Yield value per share = Expected rate of earning * Paid up value of shares
Normal rate of return
Expected rate of earning = Expected Earnings * 100
Paid up equity capital
Calculating Expected Earning
Steps Particulars Amt
1.
2.
3.
4.
Future maintainable profits
Add : Non – trading Income
Less : Preference dividend
Expected Earning Available For Appropriation
XXX
XXX
XXX
XXX
25

CAPITALISATION OF EARNINGS
Another way to compute value of large block of shares is by capitalising the earnings at
the yield rate. This gives the capitalised Value of the earnings of the company.
Capitalised value shows the value of shares, which at the normal rate of return, will yield
the amount of the expected future earnings. The expected Earnings are capitalised in the
following manner.
Capitalised Value of Earning = Expected Earnings * 100
Normal Rate of Return
Value of equity share = capitalised value of earning * paid up value per share / Paid
up capital
• FAIR VALUE METHOD
This is not a method, but a compromise formula which arbitrarily fixes the value of
shares as the Average of the values obtained by the Net Assets Method and the Yield
Method.
Fair value = net assets method value + Yield method value
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Example: The Balance Sheet of Suyash Ltd .as on 31-3-2003 is as follows:
Liabilities Rs Assets Rs
Equity Shares of Rs 10 each
10% Preference Shares of Rs
100 each
General Reserve
Profit & Loss Account
Creditors
Provision for Income tax
Proposed Dividend
5,00,000
1,000,00
1,00,000
50,000
1,10,000
40,000
60,000
9,60,000
Building
Machinery
Stock
Debtors
Bank
5,00,000
3,00,000
60,000
50,000
50,000
9,60,000
The profits of the company after charging depreciation but before income - tax @ 40%
were as follows for last five years;
1991 - Rs 1,00,000
2000 - Rs 1,40,000
2001 - Rs 1,60,000
2002 - Rs 1,70,000
2003 - Rs 1,80,000
Reasonable Return on Equity funds in this line of business is considered to be 10%.
• Find out the value of equity share under the Net Asset or Intrinsic Method after
valuing goodwill on the basis of five year’s purchase of annual super profits.
• Also , ascertain the share value on the basis of profit earning capacity in relation
to
• Average maintainable profits.
• Average dividend rate which was 8%, 9% ,7% for the last three years.
27

• Further calculate the number of shares to be purchased by an individual investor
with an amount of Rs 20,000 available for investment on the basis of appropriate
fair value of the relevant equity shares.
Solution :
• Computation of Goodwill
Capital Employed Rs Rs
Buildings 6,00,000
Machinery 2,50,000
Stock 60,000
Debtors 50,000
Bank 50,000
10,10,000
Less: Liabilities
Creditors 1,10,000
Provision for Income Tax 40,000
Proposed Dividend 60,000 2,10,000
Capital Employed 8,00,000
Average Maintainable Profits (before income tax)
( 1,00,000 + 1,40,000 +1,60,000 + 1,70,000+1,80,000)
2 = 1,50,000
Less :Income tax @40% = 60,000 90,000
28

Normal profit =(10% of 8,00,000) 80,000
Super profit 10,000
Goodwill = Super Profit x 5
= Rs 10,000 x 5
= Rs 50,000
• Valuation of shares on Net Asset Basis
Capital employed 8,00,000
Add : Goodwill (as above ) 50,000
Assets available to Shareholders 8,50,000
Less : Preference share capital 1,00,000
Assets available to Equity Shareholder 7, 50,000
Value of Equity Share = Assets available to Equity Shareholder /
Number of Equity Shares
7,50,000 / 50,000
= Rs 15 per share
• Valuation of share on Yield Basis
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Average Equity Dividend = 8 + 9 +7 / 3
= 8%
Value of Equity Share = Average Dividend Rate x Paid up value
Normal Dividend Rate
= 8 x 10 / 10
= Rs 8 per share
• Fair Value of Equity Share = 15 + 8 / 2
= Rs 11.50 per share
• Number of shares which can be purchased = 20000 / 11.50
= 1,739 Equity Shares
CONCLUSION:
30

CONCLUSION ON VALUATION OF GOODWIL
Goodwill exists in every business earning good profits. It is inseparably linked with the
business. It is the attractive force which brings in customers . It distinguishes an
old established business from a new business at its first start.
Goodwill arises when one company acquires another, but pays more than the fair market
value of the net assets (total assets - total liabilities). It is classified as an intangible asset
on the balance sheet. However, according to International Financial Reporting Standards,
goodwill is never amortized. Instead, management is responsible to value goodwill every
year and to determine if impairment is required. If the fair market value goes below
historical cost (what goodwill was purchased for), impairment must be recorded to bring
it down to its fair market value. However, an increase in the fair market value would not
be accounted for in the financial statements.
VALUATION OF SHARES CONCLUSION
Shares are valued according to various principles in different markets, but a basic premise
is that a share is worth the price at which a transaction would be likely to occur were the
shares to be sold. The liquidity of markets is a major consideration as to whether a share
is able to be sold at any given time. An actual sale transaction of shares between buyer
and seller is usually considered to provide the best prima facie market indicator as to the
"true value" of shares at that particular time.
BIBLIOGRAPHY
31

• www.wikipedia.org
• www.google.com
• Advanced Financial Accounting – Dr Varsha . M. Ainapure
32

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