Page 199 - Corporate Finance PDF Final new link

BRILLIANT’S Long Term Financing and Valuation of Goodwill & Shares 199

It is the usual practice of the company to transfer ` 30,000 every year to General Reserve.
Assume rate of taxation at 50% and the rate of normal earnings at 12.5%. Also show the workings.
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J¶r h¡ VWm gm‘mݶ A{Zª½g H$s aoQ> 12.5% h¡& d{Hª$½g ^r Xem©B¶o&
Solution:
Calculation of Average Profit

Particular 2011(`) 2012(`) 2013(`) 2014(`) 2015(`)
Sales 9,00,000 11,00,000 14,00,000 8,00,000 16,00,000
Less: Expenses 3,50,000 5,80,000 6,00,000 3,10,000 8,00,000
Profit before interest and tax (PBIT) 5,50,000 5,20,000 8,00,000 4,90,000 8,00,000
Less: Interest on Loan 20,000 40,000 50,000 60,000 20,000
Less: Interest on Debenture 30,000 30,000 30,000 30,000 30,000
Profit before tax (PBT) 5,00,000 4,50,000 7,20,000 4,00,000 7,50,000
Less: tax @ 50% NPP 2,50,000 2,25,000 3,60,000 2,00,000 3,75,000
Profit after tax (PAT) 2,50,000 2,25,000 3,60,000 2,00,000 3,75,000

2,50,000 2,25,000 3,60,000 2,00,000 3,75,000   
Average Profit 
5
= ` 2,82,000

2,82,000
Expected Rate of Earnings   100  56.4%
5,00,000
Normal Rate of Return = 12.5% (given).
Expected Rate of Earnings
Value per Share  × Face Value of Share
Normal Rate of Return

56.4%
 × ` 10 = ` 45.12
12.5%
Alternatively,

2,82,000
Capitalized value of the business based on earnings = ` = ` 22,56,000
12.5%
Capitalised Value of Business 22,56,000
Value per Share   = ` 45.12
Number of Equity share 50,000
Note: Amount transferred to reserve ` 30,000 should not be taken into consideration for
calculation of value of shares under this method.