Valuation of Goodwill

1. M Ltd proposed to purchase the business carried on by N Ltd. Goodwill for this purpose is agreed to be
valued at three years purchase of the weighted average profits of the past four years. The approximate
weight to be used and profits for the year are as under:
The appropriate weights to be used are:
2018 – 1
2019 – 2
2020 – 3
2021 – 4
The profits for these years are:
2018 – ₹ 1,01,000
2019 – ₹ 1,24,000
2020 – ₹ 1,00,000
2021 – ₹ 1,50,000
The books of account were closed every year on 31st March. On a scrutiny of the accounts, the following
matters are revealed:
(a) On 1st December, 2021, major repairs were carried out in respect of the plant, spending ₹ 30,000
which was charged to revenue. The said sum is agreed to be capitalized for goodwill calculation subject
to adjustment of depreciation @ 10% per annum on reduction balance method.
(b) The closing stock on 31st March, 2021 was overvalued by ₹ 12,000.
(c) To cover management cost, an annual charge of ₹ 24,000 should be made for the purpose of valuation
of goodwill.
Compute the value of goodwill of the business.

2. The following are the particulars about Gupta & Co, a partnership firm :
(a) Average capital employed in the business" is ₹ 7,00,000.
(b) Net trading profit of the firm for the past three years : ₹ 1,07,600, ₹ 90,700 and ₹ 1,12,500.
(c) Market rate of interest on investments 8%.
(d) Rate of risk return on capital invested in business 2%.
(e) Fair remuneration to the partners for their services ₹ 12,000 per annum.
(f) Profits included non-recurring profits on average basis of ₹ 1,000 out of which it was considered that
even non-recurring profits had a tendency to be recurring at an average rate of ₹ 600 per year.
(g) Sundry assets of the firm amounted to ₹ 7,50,000 and current liabilities ₹ 30,000.
Ascertain the value of goodwill of the firm under the following methods :
(i) Three years' purchase of super-profits method. (ii) Capitalisation method.

3. From the following particulars of a company, ascertain the value of goodwill under the following under
the followings methods:
i. 3 years’ purchase of super profit method and,
ii. Capitalizations method
iii. Annuity of super profit method when Present value of an annuity of ₹ 1.00 for 3 years at 10 % interest
is 2.49.
Particulars:
a. Average Capital Employed in the business is ₹ 14,00,000.
b. Net Trading Profit of the firm for past 3 years: ₹ 2,15,200; ₹ 1,81,400 and ₹ 2,25,000.
c. Market rate of interest on investment- 8 %.
d. Rate of risk return on capital invested in business is 2%.
e. The profit included non-recurring profits on average basis of ₹ 2,000 out of which it was considered
that even non-recurring profits had a tendency to be recurring at an average rate of ₹ 1,200 per year.
f. Sundry assets of the company ₹ 15,00,000 and current liabilities ₹ 60,000. Ignore taxation.

4. Calculate goodwill as per (a) annuity method ; (b) five years purchase of super-profits method and (c)
capitalisation of super profits method from the following information :
(i) Capital employed ₹ 6,30,000
(ii) Normal rate of profit 10 %
(iii) Present value of an annuity of ₹ 1 for 5 years at 10% 3.77545
(iv) Net profits before taxation (tax rate 50 %):
1st year ₹ 1,05,000 ;
 2nd year ₹ 1,45,000 ;
3rd year ₹ 1,75,000 ;
4th year ₹ 2,00,000;
5th year ₹ 1,50,000.
(v) Non-trading income ₹ 5,000 and debenture interest ₹ 10,000 on an average included in P/L A/c.
(vi) Fixed assets revalued by ₹ 20,000 more than existing book value of the assets.

5. From the following information, prepare statements showing:

(i) Capital Employed
(ii) Average capital Employed
(iii) Goodwill on the basis of 5 year’s purchase of the average super-profit.
Balance Sheet of Z ltd as on 31.12.2021
Liabilities ₹ Assets ₹
20,000 Equity Shares of ₹ 10 each 2,00,000 Goodwill 30,000
1,000, 9 % pref. sh of ₹ 100 each 1,00,000 Fixed Assets 3,50,000
Reserve & Provision (including Prov. Investment in 6 % Govt. Loan 45,000
for taxation ₹ 20,000) 2,00,000 Current Assets 2,00,000
10 % Debentures 90,000 Share Selling Commission 10,000
Creditors 60,000 Discount on issue of debentures 15,000
6,50,000 6,50,000
The current market value of the plant included in fixed assets is ₹ 15,000 more. The average profit of the
company (after deductions for interest & Govt. taxes) is ₹ 68,000. Expected rate of return is 10 %.

6. Balance Sheet of Ex. Td. As on 31.03.2021 is as follows:

Liabilities ₹ Assets ₹
Share Capital 6,00,000 Fixed Assets 3,70,000
Reserves and Surplus 50,000 Stock 2,20,000
Sundry Creditors 1,70,000 Debtors 2,80,000
Proposed Dividend 60,000 Cash 20,000
Provision for tax 10,000
8,90,000 8,90,000
The net profits of the company before tax were: 2017 – 18: ₹ 3, 18,000, 2018 – 19: ₹ 3, 40,000, 2019 -
20: ₹ 3,12,000. On 31.03.2021 the fixed assets are valued at ₹ 4, 50,000. Sundry debtors on the same
date included ₹ 10,000 which is unrealizable. Having regard to the type of a business a 10% return on
capital employed is considered as reasonable. Assume tax rate as 30%.
Ascertain the value of goodwill on the basis of three years purchase of annual super profits.

7. The following information relates to company as on 31st March, 2021.

Equity share capital (₹ 10) ₹ 5,00,000
10% preference share capital ₹ 2,00,000
Reserve and surplus ₹ 70,000
9 % Debentures ₹ 1,00,000
Depreciation fund ₹ 60,000
Trade payables ₹ 50,000
Unamortized preliminary expenses ₹ 20,000
Market value of the assets ₹ 70,000 more than the book value.
Profits for last 3 years after 40% tax were ₹ 75,000, ₹ 84,000 and ₹ 144000 respectively. Fair return on
capital employed in this type of business is estimated at 10%.
You are required to calculate the value of goodwill by capitalization of super profits. (Take weighted
average profit)

8. Following information relate to a company as on 31.03.2021:

(a) Equity Share Capital: 40,000 shares of ₹ 10 each fully paid and 25,000 shares of ₹ 10 each, ₹ 4 paid.
(b) 9%, Pref. Shares Capital ₹ 3, 00,000.
(c) Reserve & Surplus ₹ 90,000.
(d) 12% Debentures ₹ 2, 50,000.
(e) Assets include a non – trade investment, the market value of which is ₹ 1,20,000 (Book value being
₹ 1,40,000)
 (f) Before tax profits for last three years were ₹ 95,000, ₹ 1, 25,000 and ₹ 1, 40,000 respectively
(including income from non – trade investment of ₹ 10,000 on an average.)
(g) Rate of income tax is 30%.
(h) Fair Return on Capital Employed in this type of business is estimated at 9%.
You are required to calculate –
(i) The value of goodwill using 3 years’ purchase of Super Profit Method, and
(ii) The value of each fully paid equity share taking the value of goodwill as computed in ‘a’.
(Take simple average profit).

Valuation of Shares
9. The following is the condensed balance sheet of P Ltd on 31.3.04:
Equity and Liability ₹
40,000 equity shares of ₹ 10 each 4,00,000
Reserves 90,000
Surplus in profit and loss statement 20,000
10% debentures 1,00,000
current liabilities 1,30,000
7,40,000
Assets
Tangible fixed Assets 5,00,000
Goodwill 40,000
Current assets 2,00,000
7,40,000
On 31st December 2004, the fixed assets were independently valued at ₹ 3, 50,000 and the goodwill at
₹ 50,000. The net profits for the three years were: 2002 ₹ 51,600; 2003 ₹ 52,000 and 2004 ₹ 51,650 of
which 20% was placed to Reserve Account and this 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 the Company’s share by (a) the Assets Method and (b) the Yield Method.

10. The following particulars are available in relation to Hari Pvt Ltd. Co.
(a) Capital: 6,000, 6% Preference Shares of ₹ 100 each fully paid and 5,000 Equity Shares of ₹ 100 each
fully paid.
(b) External Liabilities - ₹ 75,000;
(c) Reserved & Surplus - ₹ 50,000;
(d) The average expected profit (after tax) -₹ 90,000;
(e) The normal Profit earned on the market value of Equity Shares of the same Company -10 %.
(f) Transfer to Reserve - 10% of the Net Profit.
Calculate the intrinsic value per Equity Share and the value per Equity Share according to Dividend Yield
Basis. Assume that total assets include ₹ 30,000 fictitious assets.

11. The following particulars of a company are available:

a) Equity Share Capital:
1,000 Equity shares of ₹ 100 each fully paid.
Preference Shares Capital:
10,000, 12% Preference shares of ₹ 10 each fully paid.
b) Reserve and surplus ₹ 25,000.
c) External Liabilities:
Creditors – ₹ 30,000
Bills payable – ₹ 10,000.
d) The average normal profit (after taxation) earned each year by the company, ₹ 35,000. Assets of the
company include one fictitious item ₹ 3,000.
The fair or normal rate of return in respect of the Equity share and preference share of this type of
company is ascertained at 10%.
Calculate the value of each type of share by:
i. The Assets Backing Method.
ii. The Earning Capacity Method.
12. The following particulars of Jupiter Co. Ltd. Are available:
Fixed Assets – ₹ 5, 80,000; Goodwill – ₹ 50,000; Current Assets – ₹ 1, 80,000; Discount on Issue of
Debentures – ₹ 10,000; 5% Debentures – ₹ 1, 00,000; Current Liabilities – ₹ 1, 30,000. The net profit after
tax for three years were: 2019 – ₹ 51,600; 2020 – ₹ 52,000; 2021 – ₹ 51,650 of which 20% was placed to
reserve and fair rate of return on investments is 10%. Issued Capital was 40,000 Equity Shares of ₹ 10
each fully paid up. Compute the value of the company’s shares by
(a) The Assets Backing Method,
(b) The Dividend Yield Method.

13. The capital structure of M Ltd. is as follows : ₹

14% Preference shares of ₹ 10 each 20,00,000
Equity shares of ₹ 10 each 32,00,000
Reserve & Surplus 16,00,000
10% Debentures 24,00,000
11% Loans from banks/financial institutions 28,00,000
1,20,00,000
The average annual profit before payment of tax and interest is ₹ 24,00,000. The income- tax rate is
assumed to be @ 50 %. Compute the value of equity shares of the company, if the applicable price-
earning ratio is 9.

14. Determine, from information below the value of each class of Equity Shares both under Assets Backing
Method and Earning Capacity Method:
(i) Paid of Share Capital (on 31.12.21):-
30,000 Equity Shares of ₹ 10 each fully paid up 3,00,000
25,000 Equity Shares of Rs .10 each ₹ 6 per Share called and paid up 1,50,000
500 12% Preference Shares of ₹ 100 each fully paid up 50,000
General Reserve A/c 1,19,500
Profit and Loss A/c (Cr.) 80,000
(ii) The Preference Share are preferential as to return of capital but do not participant in any surplus
assets in case
the company is wound up.
(i) The average annual profits of the company are ₹ 59,200.
(ii) All assets are worth their Book-Values.
(iii) 10% Return is considered fair in this type of company.

15. The following particulars are available in relation to A Ltd.

(i) Equity share capital: 5,000 Equity shares of ₹ 20 each.
(ii) Preference share capital: 1,000 8% preference shares of ₹ 100 each.
(iii) Reserves ₹ 30,000.
(iv) Current Liabilities ₹ 18,000.
(v) Loss on revaluation of fixed assets ₹ 12,000.
(vi) Average trading profit ₹ 30,000 (after tax)
(vii) Normal rate of return on capital employed 10%.
Calculate intrinsic value per equity share (assuming goodwill is to be valued at 3 years’ purchase of super
profits).

16. On the basis of the following information, calculate the value of equity shares:
₹
5,000 6% preference shares of ₹ 100 each, fully paid 5, 00,000
30,000 equity shares of ₹ 10 each fully paid 3, 00,000
Total tangible assets (other than goodwill) 9, 49,000
Total outside liabilities 95,000
Average net profit after tax 62,560
Expected normal yield for equity shares is 7% of capital employed. Goodwill is to be taken at 5 years’
purchase of super profits, if any.