From the following details related to Best Ltd., compute the value of each equity share on the basis of productivity: Year ended 31 st March Average net worth (₹) Adjusted taxed profit (₹) 2013 16,60,000 1,60,000 2014 22

CS Executive · Company Accounts & Auditing Practices · PYQS · December 2016
From the following details related to Best Ltd., compute the value of each equity share on the basis of productivity: Year ended 31 st March Average net worth (₹) Adjusted taxed profit (₹) 2013 16,60,000 1,60,000 2014 22,20,000 2,20,000 2015 22,44,000 2,40,000 Best Ltd. has ₹10,00,000 equity share capital of the face value of ₹100 per share and ₹3,00,000, 10% preference share capital with face value of ₹100 per share. The company has investments worth ₹3,00,000 (market value) on the valuation date, the yield in respect of which has been excluded in arriving at adjusted taxed profit. It is usual in similar type of companies to set aside 25% of the taxed profit for rehabilitation and replacement purposes. On the valuation date, the net worth (excluding investments) amounts to ₹24,00,000. The normal rate of return expected is 10%. The company paid dividend consistently within a range of 10% to 12% on equity shares over the previous five years and expects to maintain it.

Answer & Explanation:

Since both profit and net worth of the company is showing a steady growth, it would be reasonable to attach weight to them for valuation. Year Ended Average Net Worth Adjusted Taxed Profit Weight Factor Weighted Net worth Profit Profit 2013 16,60,000 1,60,000 1 16,60,000 1,60,000 1,60,000 2014 20,20,000 2,20,000 2 40,40,000 4,40,000 4,40,000 2015 22,44,000 2,40,000 3 67,32,000 7,20,000 7,20,000 Weighted Average 21,38,667 2,20,000 Productivity factor = (2,20,000/20,72,000) x 100 = 10.2868% Net Worth on valuation date = ₹24,00,000 Projected future maintainable profit = 10.62% of 24,00,000 = 2,46,883 Less: Rehabilitation and replacement 25% = 61,721 1,85,162 Less: Preference dividend 30,000 1,55,162 Rate of Return = ₹1,61,60 x 10 15,51,620 Add: Value of Investment 3,00,000 18,51,620 Therefore, the value of each equity shares would be: 18,51,620/10,000 = ₹185.162

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