Valuation of Business for Amalgamation and Merger

Q1: The Balance sheet of Vishu Ltd is as follows:

Balance Sheet as on 31-12-2013

Liabilities Amount Assets Amount

1,500Equity Share Capital of Rs.100 each 1,50,000 Goodwill 15,000
Capital Reserve 30,000 Land & Building 95,000
Profit & Loss Account 13,000 Machinery 60,000
Creditors 63,000 Stock 57,500
Depreciation Fund: Debtors 49,000
Land & Building 7,500 Less: R.D.D 1,500
Machinery 15,000 22,500 47,500
Cash & Cash Equivalent 3,500
Total 2,78,500 Total 2,78,500
This company’s business is to be purchased by shive Limited. You are required to value the goodwill
and the business of the company, 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%.(NRR)
2. The company average profits of the last five years after making provisions for taxation at
50% amounted to Rs.47,500.
3. The present market value of the Land & Building is R.1,10,000.
4. The other assets are to be taken at their book-value.
5. The directors of Vishnu Ltd (2 in number) are to be appointed on the Board of Directors of
Shiv Limited. The Net worth of their services is (and will be in future ) Rs.5,000 p.a. for each
of the two directors ,but no change has been made ,regarding this against the profits of the
Vishnu Limited.
6. The goodwill of the business of Vishnu Limited is to be taken at four year’s purchase of
Super profits of the company.

Q2: The following is the balance sheet of A Ltd as on 31st March 2012.

Balance Sheet as on 31-03-2012

Liabilities Amount Assets Amount

5000, Equity Share Capital of Rs.100 each 5,00,000 Goodwill 1,25,000
General Reserve 1,50,000 Land & Building 1,80,000
Less: Depreciation 36,000 1,44,000

Workmen Compensation Fund 25,000 Plant & Machinery 2,40,000 60,000

Less: Depreciation
Workmen Profit Sharing Fund 45,000 Investments (to provide replacement 1,00,000
of Plant & Machinery)
Profit & Loss Account 1,50,000 Book Debts 3,60,000
Less: R.D.D 30,000
3,30,000
Creditors 2,30,000 Stock 2,00,000
Other Liabilities 1,00,000 Cash at Bank 75,000
Preliminary Expenses 26,000
Total 12,00,000 Total 2,78,500
Further Information:

1. The profits earned by the company for the three years were as under:
Year Ended 31st March 2010 Rs.3,10,000
Year Ended 31st March 2011 Rs.2,73,000
Year Ended 31st March 2012 Rs.2,90,000
The above profit are before tax which is @ 50%
2. A Ltd. Had been carrying on business for the past several years. The company is to be taken
over by another company. For this purpose, you are required to value Goodwill by
“Capitalization of Maintainable profits method”. For this purpose, following additional
information is available:
a) The new company expects to carry on business with its own board of directors, without
any addition. The fees paid by A Ltd to its directors amounted to Rs.9,000 per year.
b) The new company expects a large increase in volume of business and therefore, will
have to take an additional office for which it will have to pay extra rent of Rs.12,000 per
year.
c) As on 31st March 2013 Land and Building were worth Rs.3,00,000 whereas Plant and
Machinery were worth only Rs.1,80,000. There is sufficient provision for doubtful debts.
There is no fluctuation in the value of investments and stocks.
d) Liability under Workmen Compensation Fund was only Rs.5000.
3. The expected rate of return on similar business may be taken at 12%.(NRR)

You are required to value Goodwill and the business according to above instructions. All your
working should form part your answer. Consider average capital employed, the same as closing
capital employed for your calculations.

Q3: Following is the Summary Balance sheet of Happy & Lucky Ltd as at 31-12-2013.

Liabilities Amount Assets Amount

Creditors 50,000Cash and Bank 10,000
Loan from Bold@18% 3,00,000Sundry Debtors 95,000
Share Capital 1,00,000Stock 55,000
Factory Fixed Assets 2,00,000
Land 50,000
Goodwill 40,000
Total 4,50,000 Total 4,50,000
Happy and Lucky Ltd decided to amalgamate with Bold Ltd on the following terms and conditions:

1. Stock, Factory Fixed Assets and Land are to be revalued at Rs.50,000, Rs.2,50,000 and
Rs.1,50,000 respectively.
2. Provisions for Doubtful debts to be made at Rs.3,000. Other assets and liabilities, except
goodwill are to be taken at the balance sheet values.
3. Goodwill is to be valued by Capitalization of future maintainable profits method.
4. For the purpose of Calculating future maintainable profits, you are informed that:
a) The trend revealed by the Revenue Statements for the three years ended 31/12/2013,
will be maintained for the next 4 years.
b) Depreciation on Factory Fixed Assets is to be provided at 20% on reducing balance
method with reference to the revalued figure.
c) The normal return expected in the line of business is 16 2/3%. Income tax rate@50%.
 d) The revenue statements for the three years ended 31/12/2013 are summarized as
under:

Particulars 2011 2012 2013

Sales 5,50,000 6,00,000 6,50,000
Less: Cost of Sales 3,30,000 3,60,000 3,90,000
Gross Margin 2,20,000 2,40,000 2,50,000
Less: Expenses 50,000 54,000 58,000
Depreciation on Fixed Assets 20,000 20,000 20,000
Interest on Bold’s Loan 90,000 72,000 54,000
Net Profit 60,000 94,000 1,28,000
You are required to value the goodwill and the business of the company for the purpose of the
amalgamation.

Q3: The Tom Pvt. Ltd is to be absorbed by the jerry Co. Pvt Ltd. In order to decide upon the
purchase consideration, it is necessary, among other thing to value the goodwill attaching to the
business of Tom Co. Pvt Ltd. The two companies agree that the basis of the average annual
super profits, the net profit being averaged over five years and subject to adjustment is to be
considered. The profit of the Tom Co. Pvt. Ltd for the first five years (before charging income
tax@50% on income) are as follows:

Year Profit (Rs)

2009 1,00,000
2010 1,30,000
2011 90,000
2012 1,10,000
The directors of Tom co. Pvt. Ltd (3 in number) will be appointed on the Board of Jerry Co. Pvt.
Ltd on absorption and it is considered that their services have been (and Will be in the future)
worth Rs.10,000 each per annum. There has never been any charge against the profit of Tom Co.
Pvt Ltd, for such services. The average capital invested in net tangible assets over the period of
Rs.3,60,000 and it is considered that the normal return to be expected from the business carried
on by Tom Co. Pvt. Ltd is 10%.

Calculate the value of goodwill and business of Tom Co. Pvt. Ltd based on the above information.

Q4: Following is the Balance sheet of B Ltd as on 31/03/2013.

Liabilities Amount Assets Amount

50,000 Equity Shares of Rs.10 each 5,00,000 Goodwill 50,000
General Reserve 1,00,000 Building 4,00,000
10% Debentures 4,00,000 Plant & Machinery 2,50,000
Profit and Loss a/c 25,000 Investments 1,00,000
Sundry Debtors 50,000 Stock 1,50,000
Bills Payable 25,000 Sundry Debtors 90,000
Bank Balance 60,000
Total 11,00,000 Total 11,00,000
For the Last five years ended 31st March, the company’s profit after tax were as follows:

Year Profit (Rs)

2009 85,000
2010 90,000
2011 96,000
 2012 1,10,000
2013 1,39,000
The company set aside 10% of profit for General Reserve. The Fair rate of return in the industry may
be taken at 10%(NRR). Find out the value of business and the equity shares on the basis of earning
capacity.

Q5: The following is the Balance sheet of M/s Shining star Ltd as ta 31/03/2014.

Liabilities Amount Assets Amount

Share Capital: Authorized Fixed Assets
50,000, 8% Cumulative Preference shares 5,00,000 Land & Building 2,20,000
of Rs.10 each
40,000 Equity shares of Rs.10 each 4,00,000 Plant & Machinery 4,40,000
9,00,000 Furniture 80,000
Issued and Fully paid up: Current Assets:
40,000 8% Cumulative Preference shares of 4,00,000 Stock in Trade 3,10,000
Rs.10 each
30,000 Equity Shares of Rs.10 each 3,00,000 Debtors 3,50,000
General Reserve 1,10,000 Cash & Bank Balance 1,70,000
Profit & Loss Account 1,00,000 Miscellaneous Expenditure:
Current Liabilities & Provisions: Deferred Advertising Expenses 70,000
Current Liabilities 1,00,000
Provision for Depreciation 4,55,000
Provision for Taxation 90,000
Proposed Dividend 85,000
Total 16,40,000 Total 16,40,000
The Turnover and net profit of last 3 years ended 31st March 2013 are as given below:

Year Turnover Net Profit

2010-2011 31,20,000 3,05,000
2011-2012 40,44,000 4,50,000
2012-2013 50,00,000 5,60,000
Calculate the fair value of Equity shares of the Company, assuming that the fair return on
investment in the company doing similar business is 12%. Also compute the value of business.

Q6: Find out the Fair value of share of Yash Ltd and value of business from the following information:

Particulars Amount
Issued and Paid-up Capital:
a) 2,50,000 Equity shares of Rs.10 each fully paid Rs.25,00,000
b) 50,000 10% Preference shares of Rs.10 each fully paid Rs.5,00,000
Reserves & Surplus
a) General reserve Rs.10,00,000
b) Profit and Loss A/c Balance (Cr) Rs.7,50,000
Current Liabilities
a) Creditors Rs.8,50,000
b) Bank Overdraft Rs.4,50,000
Fictitious Assets
a) Preliminary Expenses Rs.2,50,000
b) Discount on issue of shares Rs.1,00,000
The Profit of the company for the year Rs.12,50,000 before tax
 It is expected that profit will increase by 20% in future
The rate of income tax 50%
Normal Rate of Return 14%
Q7: Find out the Fair value of share of Amber Ltd and value of business from the following
information:

Particulars Amount
1. 1,00,000 Equity Shares of Rs.100 each fully paid 1,00,00,000
2. 10,000,12% Preference Shares of Rs.100 each fully paid 10,00,000
3. Securities Premium 11,50,000
4. Profit & Loss Account 33,58,000
5. General Reserve 18,85,000
6. Current Liabilities:
a) Creditors 31,20,000
b) Bills Payable 10,60,000
7. Average Profit after Tax (for last three years) 5,85,000
8. 20% of PAT is transferred to General Reserve every year
9. Fictitious Assets Rs.80,000
10. Normal Rate of Return is 10%
Considering the above information, compute the value of Equity Shares by:

1. Assets Backing Method

2. Yield Method
3. Fair Value Method

Q8: On 31st March,2014 the Balance sheet of Gomati Ltd was as follows:

Liabilities Amount Assets Amount

Authorized Capital Land & Building 3,00,000
20,000 Equity shares of Rs.100 each 20,00,000 Plant & Machinery 1,72,500
Issued and Paid Capital Stock 4,50,000
15,000 Equity Shares of Rs.100 each Sundry Debtors 9,07,500
15,00,000
Less: Call in Arrears at Rs.20 (2000) 14,98,000
Profit & Loss account 1,54,500 Cash 20,000
Bank Overdraft 32,000 Bank 1,30,000
Creditors 1,15,500
Provision for Tax 67,500
Proposed Dividend 1,12,500
Total 19,80,000 Total 19,80,000
The Net Profit of the company after providing for tax were as follows:

Year Ended Profit

st
31 March,2014 1,72,500
31st March,2013 1,50,000
st
31 March,2012 1,87,500
31st March,2011 1,80,000
st
31 March,2010 1,35,000
On 31st March,2014 Land & Building were valued at Rs.3,75,000 and Plant & Machinery were valued
at Rs2,25,000. Normal rate of Return can be considered at 8%(NRR). Goodwill is to be valued at 3
 years purchase of super profits based on average profit of last 5 years. Find out the intrinsic value of
fully paid and partly paid equity shares.

Q9: Shibhay Ltd. Started operations in 2002 with a paid up capital Rs.2,50,000. Profit after tax has
been as follows:

Year Ended Profit

2010 (20,000) due to strike
2011 44,000
2012 51,500
2013 58,000
2014 65,000
Income tax so far has been at the average rate of 40% but is likely to be 50% henceforth. Dividends
were distributed @10% in 2011 and 2012 and 15% on the paid-up capital in 2013 and 2014.

The market price of the share is Rs.125 at year ending 31/3/2014.Profits for the year till 2014 have
been ascertained after debiting Rs.20,000 as manager’s salary which is to be increased to Rs.30,000
w.e.f 1stApril 2014.The company has secured a beneficial contract which fetch an advantage of
Rs.20,000 p.a for next five years from 1/4/2014.You are required to ascertain goodwill, considering
average capital employed, average dividend, normal rate of return and future maintainable
weighted profit by 3 year’s super profit method.Further you also required to ascertain the value of
the shares under intrinsic and yield methods, with the following information furnished to you.

Balance Sheet as of Shibay Ltd on 31st March,2014

Liabilities Amount Assets Amount

Paid up Capital: Goodwill at cost 25,000
Shares of Rs.100 each fully paid 2,50,000 Land & Buildings 1,10,000
General Reserve 29,150 Plant & Machinery 1,00,000
Profit & Loss Appropriation a/c 27,500 Stock in Trade 1,50,000
Bank Overdraft 28,350 Book Debts Le 90,000
ss Provision
Sundry Creditors 90,500
Provision for Taxation 49,500
Total 4,75,000 Total 4,75,000

Q:10: The Balance Sheet of Suyash Ltd as on 31st March 2013 is as follows:

Liabilities4 Amount Assets Amount

Equity Shares of Rs.10 each 5,00,000 Building 5,00,000
10% Preference Shares of Rs.100 each 1,00,000 Machinery 3,00,000
General Reserve 1,00,000 Stock 60,000
Profit & Loss Account 50,000 Debtors 50,000
Creditors 1,10,000 Bank 50,000
Provision for Income Tax 40,000
Proposed Dividend 60,000
Total 9,60,000 Total 9,60,000
The profits of the company after charging depreciation but before charging income tax@40% were
as follows for last years:

Year 2009 2010 2011 2012 2013

 Profit 1,00,000 1,40,000 1,60,000 1,70,000 1,80,000
Reasonable rate of return on equity funds in this line of business is considered to be 10%.

1. Find out the value of an Equity shares under the Net Asset or Intrinsic Method after valuing
goodwill on the basis of Five year’s purchase of annual super profits.
2. Also Ascertain value of share on the basis of profit earning capacity.

Q11: The balance sheet of Ramesh Ltd as on 31st March,2014 was as follows: (Rs. In Laks)

Liabilities Amount Assets Amount

Equity Shares of Rs.10 each 500 Building 220
Profit and Loss Account 103 Machinery 95
Bank Overdraft 20 Stocks 350
Creditors 77 Debtors 155
Provision for Tax 45
Proposed Dividend 75
Total 820 Total 820
The net profit of the company after deducting all working charges and providing depreciation
and taxation were as under:

Year 2009 2010 2011 2012 2013

Profit 85 96 90 100 95
On 31st March 2014 Building was valued at Rs.250 lakhs and Machinery at Rs.150 Lakhs. The other
assets and Liabilities have been correctly valued. In view of the nature of business, it is assumed that
10% is reasonable return on tangible capital. Consider Closing capital as Average Capital Employed
and Simple Average for computing Average Profit. You are required to determine:

a) Value of Goodwill on the basis of 5 years purchasing of super profits.

b) Intrinsic value of Equity shares.
c) Value of Business.

Q12: The Balance Sheet of Raj Company as at 31/3/2014 was as follows:

Liabilities Amount Assets Amount

Share Capital 2,000 Shares of Rs.100 each 2,00,000 Land and Building 1,10,000
General Reserve 40,000 Plant & Machinery 1,30,000
Profit and Loss a/c 32,000 Patents and Trademark 20,000
Sundry Creditors 1,28,000 Stock 48,000
Income Tax 60,000 Debtors 88,000
Bank Balance 52,000
Preliminary exp 12,000
Total 4,60,000 Total 4,60,000
The expert valued the Land and Building at Rs.2,16,000, Goodwill at Rs.1,60,000 and Plant and
Machinery at Rs.1,10,500. Out of the total debtors, it is found that debtors of Rs.8,000 are bad.

The Profits of the company have been as follows:

2011-12 80,000
2012-13 90,000
2013-14 1,06,000
The company follows the practice of transferring 25% of the profits to general reserve. Similar type
of companies earns 10% of the value of their shares: Ascertain the value of the company’s shares as
under:

1. Intrinsic Value Method

2. Yield Value Method
3. Fair Vale Method