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494 Corporate Finance BRILLIANT’S

Plant 10,00,000
(2) Current Assets:
(a) Inventories - Sock-in-trade 15,00,000
(b) Trade Receivables - Debtors 5,00,000
TOTAL 41,50,000

Additional Information:
(i) Net profits of the company for the last five years before providing for taxation were as
follows: ` 4,10,000; ` 6,40,000; ` 7,00,000; ` 8,50,000; ` 9,00,000.
(ii) Managerial remuneration of ` 60,000 has been charged for each year.
(iii) The market value of the assets were :
Inventories- ` 15,50,000; Plant- ` 10,40,000; Factory premises- ` 12,83,000.
(iv) Taxation may be considered at 50%
(v) Goodwill should be valued at 5 year's purchase of super profits.
(vi) Normal rate of return - 10% p.a.
On the basis of the above information, find out the intrinsic value of shares. Indicate assump-
tions, if any, clearly. [See Illustration 3.1.2]
Q.16. From the following information, calculate value of goodwill taking 5 year's purchase of
super profit.
(i) Equity Share Capital: 5,000 Equity Shares of ` 20 each fully paid.
(ii) Preference Share Capital: 1,000, 8% Preference Shares of ` 100 each fully paid.
(iii) General Reserve: ` 30,000.
(iv) Loss on revaluation of Plant and Machinery: ` 12,000
(v) Average trading profit after tax: ` 30,000
(vi) Normal rate of return on capital employed: 12%. [See Illustration 3.1.13]
Q.17. XYZ Ltd. has obtained capital from the following sources, the specific costs are also
noted down against them:
Sources of Capital Book Value Market Value Cost of Capital
(`) (`)
Debentures 4,00,000 3,80,000 5%
Preference Shares 1,00,000 1,10,000 8%
Equity Shares 6,00,000 12,00,000 13%
Retained Earnings 2,00,000 – 9%
Your are required to calculate Weighted Average Cost of Capital using: (a) Book Value Weights
(b) Market Value Weights. [See Illustration 4.1.20]
Q.18. Companies U and L are identical in every respect except that the former does not use
debt in its capital structure, while the latter employs ` 6,00,000 of 15% debt. Assuming
that (a) all the MM assumptions are met, (b) the corporate tax rate is 50%, (c) the EBIT
is ` 2,00,000, and (d) the equity capitalization of the unlevered company is 20%, what
will be the value of the firms, U and L? Also determine the weighted average cost of
capital for both the firms. [See Illustration 4.2.12]