VALUATION OF GOODWILL AND SHARES.

Illustration 1 :
A company is desirous of selling its business to another company. In this regard you are asked to ascertain the
value of goodwill of the business under capitalization method, from the following information :
The company has earned an average past profit of Rs. 1,40,000 p.a. and the same amount of profit is likely to be
earned in future also except that :
(i) Directors fees of Rs. 22,000 charged against such profit will not be payable by the new company whose existing
Board can manage the purchased business .
(ii) A Building rent of Rs. 24,000 p.a. will not be incurred in future since the new company has its own premises.
(iii) The net assets, other than goodwill were Rs. 18,00,000 and it was considered that a considerable return on
investment in this type of business would be 10 %.
Illustration 2 :
Calculate the value of Goodwill under Capitalization method of Mohan Company Ltd. carrying on business as a
retail traders from the following information :
Balance Sheet as on 31-3-2007
Liabilities
Rs.
Assets
Rs.
The company was
Shares capital :
Goodwill at Cost
25,000
incorporated on 1st April.
3000 Equity Shares of Rs.10
Land & Buildings
1,10,000
The profits earned, before
each fully paid-up
1,00,000
3,00,000 Plant & Machinery
the provision of tax have
Profit & Loss A/c
1,50,000
56,650 Stock
been as :
Bank Overdraft
90,000
58,350 S. Debtors
year
Rs.
31-3-2005
Sundry creditors
31-3-2003 60,000
31-3-2006
40,500
Provision for Taxation
31-3-2004 65,000
31-3-2007
19,500
4,75,000

4,75,000

Income-tax liability is assumed at the rate of 50% has been payable on these profits.
The reasonable rate of return on capital employed is 10%.
Illustration 3 :
The Balance Sheet of ABC company Ltd. discloses the financial position as on 31st March, 2007 as follows :
Balance Sheet as on 31-3-2007
Liabilities
Rs.
Assets
Rs.
Shares capital :
Goodwill at Cost
30,000
Equity Shares of Rs. 10 each fully
Land & Buildings
1,75,000
paid-up
3,00,000 Plant & Machinery
General Reserves
90,000
60,000 Less depreciation
Profit & Loss A/c
1,15,000
26,000 Stock at cost
Creditors
98,000
71,000 S. Debtors
Provision for taxation
95,000
55,000 Less : R.D.D. 3,000
Cash at Bank
7,000
5,12,000

5,12,000

Ascertain the value of Goodwill under Capitalization method from the information given below :
(a) The reasonable rate of return on capital employed in the class of business done by the company is 20%.
(b) The companies average profits of the last 5 years before the provision of tax liability, amounted to Rs. 95,000.
(c) The rate of tax may be taken at 50%.
Illustration 4 :
A Company desirous of selling its business to another company. You are asked to ascertain the value of Goodwill
for this purpose under capitalization of average profit method from the information given below :
(a)
Company has earned an average past profit of Rs. 1,50,000 p.a. and the same amount of profit is likely to be
earned in future also except that :
(i) Directors fees of Rs. 12,000 p.a. charged against such profits will not be payable by New Company as its
existing Board can manage the purchased business.
(ii) Building rent of Rs. 25,000 p.a. which had been paid by vendor company will not be incurred in the future
Since the new company owns its own premises.
(b) The net asset other than goodwill of the company were Rs. 15,75,000
(c) The reasonable rate of return on investment in this type of business would be 10%.
Illustration 5 :

70,000
78,000
90,000

The net profits of the company after providing taxation for the last four years are Rs. 1,20,000 ; Rs. 1,25,000 ; Rs.
1,30,000 and Rs. 1,50,000. The capital employed in the business is Rs. 5,00,000, on which a reasonable rate of
return of 20% is expected.
Illustration 6 :
From the following calculate the value of goodwill according to capitalization of Average Profit Method :
(i) Average Capital employed in the business Rs. 7,00,000.
(ii) Net trading profit of the firm for the past three years.
Years
Profit (Rs.)
2005
1,48,100
(ii) Rate of interest
expected from Capital
2004
1,47,600
2006
1,52,500
having regard to the risk
involved -18%.
(iv) Sundry Assets (excluding goodwill)-Rs. 7,54,762., Sundry liabilities Rs. 31,329
(v) Fair remuneration to the partners for the services. Rs. 12,000 p.a.
Illustration 7 :
Form the following particulars calculated the value of Goodwill under capitalization method .
(i) Capital employed Rs. 70,000. (ii) Trading results for the past four years.
(iii) Normal rate of return is 20%.
( Super profit method )
Illustration 1 :
From the information given below, Ascertain the value of goodwill on the basis of
(a) 4 years purchases of super profit method.
(b) Annuity method, taking the present value of annuity of Rs. 1 for every five years at 15 % as 3.3522 and
(c) Capitalization of super profit method.
(i)
The net profit of the business, after providing for taxation, for the past 5 years are ; Rs.30,000 , Rs.1,50,000 ;
Rs.3,50,000 ; Rs.80,000 ; and Rs.2,40,000.
(ii) The capital employed in the business is Rs.7,50,000.
(iii) The normal rate of return expected in this type of business is 20%.
(iv) It is expected that company will be able to maintain its super-profit for the next 5 years.
Illustration 2 :
ABC Company Ltd. Provides you the following information. Calculate the value of goodwill on the basis of 4 years
purchases of super profit of the company.
(a)
Profits of the company during past 5 years.Rs.80,000 ; Rs.70,000 ; Rs.72,000 ; Rs.64,000 ; Rs.1,12,000. (b)
Normal rate of return at 10%. (c) Capital employed in the business is Rs.6,00,000.
Illustration 3 :
On 31st march, 2007 the Balance sheet of Menon Ltd. Was as follows :
Balance Sheet
Liabilities
Rs.
Assets
Rs.
Equity shares of Rs. 100 each
5,00,000 Land & Buildings
2,20,000
Profit & Loss A/c
1,03,000 Plant & Machinery
95,000
Creditors
97,000
Stock
3,50,000
Provision for tax
45,000 S. Debtors
1,55,000
Proposed Dividend
75,000
8,20,000
8,20,000
The net profits of the Company, after deducting all working charges and providing for depreciation and taxation
were as under :
year
Rs.
31-3-2005
90,000
31-3-2003 85,000
31-3-2006
1,00,000
On 31st March, 2007, Land & Building were
31-3-2004 96,000
31-3-2007
95,000
valued at Rs. 2,50,000 and plant & Machinery
at Rs. 1,50,000.
In view of the nature of the business, it is considered that 10% is a reasonable return on tangible capital.
Calculate the value of goodwill based on 5 years purchases of super profit after taking into consideration the
revised values of fixed assets.
Illustration 4 :
Balance Sheet of Ramoji Ltd. On 31 st March,2009 was as under

Liabilities
Capital
Creditors
Bills Payable

Rs.
2,50,000
80,000
20,000

Assets
Land & Buildings
Plant & Machinery
Furniture
Stock
Cash at bank

five
Yea
r
200
2
200
3

Profit

3,50,000
2004
45,000

40,000

2005

Rs.
1,80,000
1,10,000
2,000
8,000
50,000
3,50,000

The profit of the

business for the last
years ending 31st
March, 2009 is as
follows :

50,000

The
assets are revalued as follows. Land & Building Rs.
42,000
2006
53,000
19,400 ;
Machinery Rs, 1,18,000 and Furniture Rs. 1,000. Find out
goodwill by
capitalization of Super Profit Method.
Illustration 5 :
From the information given below. Calculate the value of goodwill under 3 years purchases of super profit of the
business.
(a) Profits of the business for the last four years.
Year
31-3-2003
31-3-2004

Profit Rs.
15,000
18,000

Year
31-3-2005
31-3-2006

Profit Rs.
25,000
30,000

(b) The total assets of the business as per last balance sheet are Rs. 2,50,000 which include land & building Rs.
50,000 (market value Rs. 60,000) plant & machinery Rs. 98,000, investment (5% Government loan held since the
starting of the business) Rs. 20,000 and current assets Rs. 80,000.
(c) The liabilities of the business include, depreciation fund (for Land& Buildings Rs. 5,000 and for Plant and
Machinery Rs. 8,000) Rs. 13,000. Other liabilities (excluding owners funds) Rs. 50,000.
(d) The average rate of return on capital employed is expected from such business is 10%.
Illustration 6 ;
The Balance sheet of Vijay Ltd. Is as follows :
Balance Sheet as on 31-3-2007
Liabilities
Rs.
Assets
Rs.
Share capital :
Goodwill
15,000
Equity shares of Rs. 100 each.
1,50,000 Land & Buildings
95,000
Capital reserve
30,000 Plant & Machinery
60,000
Profit & Loss A/c
13,000 Stock
57,500
Creditors
63,000 Debtors
49,000
Depreciation Fund :
Less R.D.D.
1,500
47,500
Machinery
22,500 Cash & Bank balance
3,500
2,78,500

2,78,500

The above company

is purchased by Shiv Company Ltd. You are required to calculate the value of goodwill of the company at four years
purchase of the super profits, after taking into account, the following information.
1. The reasonable return on capital employed in the class of business done by the company is 12%.
2. The companies average profits of the last five years after making provision for taxation, amounted to Rs. 47,500.
3. The present market value of Land & Building is Rs. 1,10,000.
4. The other assets are to be taken at their book values.
5. The directors of Vijay Ltd. (two in number) are to be appointed on the Board of Directors of Purchasing
company Ltd., on a payment of Rs. 5,000 p.a. for each of them for their services, but no charge has been made,
regarding this against the profit of Vijay Company Ltd.
6. Depreciation on increased value of Land & Building may be ignored.
Illustration 7 :
Vishnu Ltd. Is interested to buy the business of Ram Ltd. For this purpose it is decided to calculate the goodwill
by capitalizing the future maintain profits after tax on the basis of the past 5 years average annual profits.
The necessary information is given below :
(a) The average return from the particular line of business is estimated at 20 %.
(b) The pre-tax profits of the latest five years are as :

Year
31-3-2002
31-3-2003
(c)
(d)
(e)

Profit Rs.
40,000
30,000

31-3-2004
31-3-2005
31-3-2006

32,000
30,000
33,000

Profits for the year ended 31-3-2002 include a capital profit of Rs. 10,000.
The profit for the year ended 31-3-2006 is after the adjustment of Rs. 7,500 being loss by fire.
An average rate of tax payable as income-tax is taken at 40%.
Liabilities

Share Capital :
Equity shares of Rs.10 each
General Reserve
P & L A/c
Current liabilities

Hamer
Ltd. ( Rs.)

Grace Ltd.
( Rs.)

5,00,000
2,00,000
1,00,000
1,00,000

2,00,000
20,000
30,000
50,000

Assets
Fixed assets less
depreciation
Investment (in G.P. notes
of Rs. 1,00,000 at 6%)
Current assets

Hamer Ltd.
( Rs.)

Grace
Ltd. ( Rs.)

4,00,000

1,00,000

1,00,000
4,00,000

2,00,000

9,00,000
3,00,000
9,00,000
3,00,000
(f) Capital employed in the business is Rs. 65,000.
Illustration 8 :
The net profits of the company before providing for taxation at 50% for the past five years are as : Rs. 1,56,000 ;
Rs. 1,64,000 ; Rs. 1,76,000 ; Rs. 1,86,000 and Rs. 1,98,000. The capital employed in the business is Rs. 8,00,000
on which a reasonable rate of return 0f of 10% is expected. It is expected that the company will be able to maintain
its super profit for the next 5 years.
(i) Calculate the value of the goodwill on the basis of an annuity of super profit, taking the present value of an
annuity of Rs. 1 at 10% interest after 5 years is Rs. 3.78.
(ii) Calculate the goodwill by capitalizing super profit on the basis of same return of 10%.
Illustration 9 :
Hamer Ltd. and Grace Ltd. proposes to amalgamation .
Net Profit (after taxation)
Year
Hamer Ltd.( Rs.)
Grace Ltd. (Rs.)
31-3-2005
1,30,000
45,000
31-3-2006
1,25,000
40,000
31-3-2007
1,50,000
56,000
Goodwill for the purpose of amalgamation may be taken as 4 years purchases of average super profits trading on
the basis of 15% normal profit on closing capital invested. The current assets of Hamer Ltd. are to be taken as
Rs. 4,20,000 and that of Grace Ltd. As Rs. 2,10,000.
Ascertain the value of goodwill.
VALUATION OF SHARES
Illustration 1 :
On 31st March, 2007 the Balance-Sheet of ABC company Ltd. reveals the following position :
Balance Sheet
Liabilities
Rs.
Assets
Rs.
Equity Shares of Rs. 10 each
4,00,000 Fixed Assets
5,00,000
Reserves
90,000 Current assets
2,00,000
Profit & Loss A/c
20,000 Goodwill
40,000
5% Debentures
1,00,000
Current Liabilities
1,30,000
7,40,000
7,40,000
On 31st March, 2007, the fixed assets were independently valued at Rs. 3,50,000 and the goodwill at Rs. 50,000.
The net profit for the 3 years were ; 31-3-2005 Rs. 51,600 ; 31-3-2006 Rs. 52,000 ; 31-3-02007 Rs. 51,650 of which
20 % was placed under reserve, the proportion being considered reasonable in the industry in which the company is
engaged and where a fair investment return may be taken at 10%.
Compute the value of share of the company by
(a) the net asset method, (b) the yield value method, (c) the fair value method.
Illustration 2 :
The following is the Balance Sheet of Dinesh Company Ltd. as on 31-3-2007.

&
by
Rs.
Rs.
to

Liabilities
Share Capital :
Eq. Shares of Rs. 10 each
General Reserves
Taxation Reserves
Workmens Saving A/c
Profit & Loss A/c
Sundry Creditors

Rs.
1,00,000
50,000
20,000
20,000
30,000
40,000
2,60,000

Assets
Land & building
Plant & Machinery
Trade Marks
Stock
Debtors
Preliminary Expenses

Rs.
70,000
70,000
20,000
45,000
48,000
7,000
2,60,000

The Plant &

Machinery and Land
Building were valued
expect valuator for
60,000 ; and Rs.
1,30,000 respectively.
5,000 of the debtors is
be taken as bad. The
profits of the company

were :
31-3-2005 Rs. 50,000 ; 31-3-2006 Rs. 60,000 and on 31-3-2007 Rs. 70,000.
It is the practice of the company to transfer 10% of the profits to reserves.
Provision for taxation is at 50% of the profit of the company .
Shares of similar companies quoted in the stock exchange yield 12 % on their market value. Goodwill of the
company may be taken at Rs. 1,00,000.
Find out the value of shares by
(a) Net asset method, (b) Market value method, (c) Fair value method.
Illustration 3 :
Vivek wants to buy all the shares of Nanda Ltd.
Balance Sheet of Nanda Ltd. as on 31-3-2007.
Liabilities
Rs.
Assets
Rs.
Share Capital :
Fixed aeests cost
1,00,000
( Rs. 10 each)
6,00,000 Less
Reserves
1,00,000 Depreciation
2,70,000
Profit & Loss A/c
25,000 Current Assets
2,70,000
8% Debentures
2,00,000 Preliminary Expenses
16,500
Sundry Creditors
80,000 Bank Balance
60,000
Provision for tax
71,500
10,76,500
10,76,500
(a) For the purpose of valuation of shares goodwill is valued on the basis of 2 years purchases of super profit
based on average profits (after tax) of the last 3 year .
(b) Profits (after tax) are as follows :
Year
Profit
31-3-2006
4,20,000
31-3-2005
3,80,000 31-3-2007
5,00,000
(c) Rate of return on capital employed is 20%.
Find out the value of share under Net asset method.
Illustration 4 :
The Balance sheet of Indian Seamless Steels Ltd. as on 31st March,2004 revealed the following :
Balance sheet
Liabilities
Rs.
Assets
Rs.
Share Capital (issued)
Fixed Asset
9,00,000
Equity shares of Rs. 10 each
Less :
Rs. 8 paid.
8,00,000 Depreciation
1,10,000
7,90,000
Reserves
2,00,000 Goodwill
80,000
Profit & Loss A/c
20,000 Current Assets
4,90,000
10% Debentures
1,00,000 Discount on Debentures
10,000
Current Liabilities
2,50,000
13,70,000
13,70,000
1. Fixed assets and goodwill were revalued at Rs. 7,50,000 and Rs. 1,00,000 respectively.
2. The net profit after tax for the immediately preceding three years were Rs. 1,10,000 ; Rs. 1,05,000 and
Rs. 1,45,000 of which 25 % were transferred to reserves.
3. A fair return in the industry in which the company is engaged is considered to be 10%.
Compute the value of companies shares, by
(a) Net Asset method,
(b) Yield value method,
(c) Fair value method.
Illustration 5 :
Following information pertains to Clinton Corporation Ltd.
10,000 12% preference shares of Rs. 10 each Rs. 1,00,000
25,000 Equity Shares of Rs.10 each
Rs. 2,50,000
Average annual Profits (before tax)
Rs. 2,00,000

Income tax
30%
Transfer to reserves
20%
Normal return in similar industry
25%
Mr. Saddam holds 200 Equity Shares of the company. He has requested you to value his shareholdings on the
basis of above information. Please do the needful.
Illustration 6 :
Following is the Balance Sheet of Vinaya Company Ltd. on 31-3-2007.
Balance Sheet
Liabilities
Rs.
Assets
Rs.
Equity Shares of Rs. 100
Land & Buildings
1,00,000
each fully paid-up
6,00,000 5% Govt. Loan
4,00,000
12% Preference Shares of
Stock
5,00,000
Rs. 100 each
3,00,000 Debtors
4,00,000
Profit & Loss A/c
Less : R.D.D
20,000
3,80,000
On 1-4-2006
60,000
Bank
2,00,000
On 31-3-2007
5,40,000
6,00,000 Preliminary Expenses
90,000
Depreciation Fund
Land & Buildings
20,000
Current Liabilities
1,50,000
16,70,000
16,70,000
Adjustment :
(i) Land and
Building is valued at Rs. 1,50,000.
(ii) Profits of the past three years have shown an increase of Rs. 20,000 annually.
(iii) The normal rate of return on capital employed is at 10%.
(iv) Tax liability is assumed at 50%.
Find out the fair value of equity shares of the company assuming at 3 years purchases of super profit.
Illustration 7 :
The share capital of XY Ltd. consists of Rs.100 each, Rs. 50 paid and 2,500 8% cumulative preference shares of
Rs. 100 each fully paid.
The Balance Sheet of XY Ltd. shows assets (excluding goodwill) Rs. 15,00,000 ; Liabilities Rs. 4,00,000 ; Reserve
Rs. 3,50,000 ; and paid-up capital Rs. 7,50,000. The profit of XY Ltd. for the previous 5 years were : Rs. 1,00,000,
Rs. 3,00,000 ; Rs. 5,000 ; Rs. 2,00,000 and Rs. 4,45,000.
The assets and liabilities are accepted at Balance Sheet figures and there are no arrears of dividends on
Preference shares which in similar business yield a return 6% under current market conditions. The normal yield on
capital employed in similar business is 10% and goodwill is valued at 5 times the purchase price of the super profit.
You are asked to value the preference shares and the Equity shares in XY Ltd.