Page 226 - Corporate Finance PDF Final new link

226 Corporate Finance BRILLIANT’S

3,95,000
Add: 10% Debentures (Note 4) 90,000
Closing Capital Employed 4,85,000
(b) Average Capital Employed

Particulars `

Closing Capital Employed 4,85,000
Less: ½ of Adjusted Average Trading Profit
after tax (Note 1) (1/2 of ` 71,150) 35,575
Average Capital Employed 4,49,425

(c) Value of Goodwill = 5 year's purchase average super profit
= 5 × ` 26,207 (Note 2)
= ` 1,31,035, after Round off
= ` 1,31,000
Working Notes: NPP
1. Calculation of Adjusted Average Trading Profit after Tax:

Particulars `
Average Annual Profit after tax 68,000
Less: Interest on investment after tax shield: ` (45,000 × 6/100 × 50/100) (Note 5) 1,350
66,650
Add: Interest on Debenture after tax shield: ` (90,000 × 10/100 × 50/100) (Note 5) 4,500
71,150

2. Calculation of Average Super Profit
Particulars `

Adjusted Average Trading Profit after tax 71,150
Less: Normal return on Average capital employed (10% on ` 4,49,425) 44,943
Super Profit 26,207
3. At the time of calculating capital employed, investment in 6% Government Bond is not
being taken into consideration.
4. Debenture is treated as a part of capital employed.
5. For calculating adjusted trading profit, interest on investment (after tax) is deducted
from average annual profit (because, investment has not been considered while calculat-
ing capital employed).
Similarly, interest on Debenture (after tax) is added back to average annual profit.