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Pinnacle Academy
Solutions of Tests of
April 2015 Batch
201-202, Florence Classic, Besides Unnati Vidhyalay,
Jain Derasar Road, Ashapuri Society, Akota, Vadodara-20. ph: 98258 561 55
Test of
Valuations
Conducted on 17th November 2015
(Solution is at the end with markings for self assessment)
Time Allowed-1 hour
Q1
Maximum Marks- 30
Balance sheets of three companies – A, B and C as on 31st December 2012 are
given below:
Liabilities
Equity Share Capital (Rs.100)
Equity Share Capital (Rs.50)
10 % Preference Capital (Rs.100)
Profit and Loss Account
Creditors
12.5 % Term Loan
13% Debentures
Total
Assets
Goodwill
Plant and Machinery
Furniture and Fittings
Investments:
Trade
Non-trade
Stock
Debtors
Bills Receivables
Cash
Total
A Ltd.
B Ltd.
C Ltd.
10,00,000
5,00,000
2,00,000
5,00,000
2,00,000
--------24,00,000
8,00,000
2,00,000
1,25,000
2,75,000
2,50,000
----1,00,000
17,50,000
5,00,000
1,00,000
75,000
2,50,000
1,00,000
50,000
80,000
11,55,000
2,50,000
4,00,000
2,00,000
5,80,000
2,50,000
1,50,000
4,50,000
3,25,000
1,40,000
9,00,000
1,50,000
1,00,000
1,40,000
2,50,000
10,000
24,00,000
----5,20,000
1,50,000
70,000
20,000
10,000
17,50,000
--------1,60,000
70,000
----10,000
11,55,000
Following are the actual market values of certain assets:
Plant and Machinery
Furniture and Fittings
Investments:
Trade
Non-trade
Stock
A Ltd.
5,00,000
2,50,000
B Ltd.
3,00,000
1,70,000
C Ltd.
3,00,000
1,00,000
8,00,000
75,000
80,000
----4,80,000
1,00,000
--------1,80,000
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Debtors of A Ltd. are irrecoverable to the extent of 10% and of B Ltd. to the extent of
Rs.5,000. However, debtors of Rs.15,000 are omitted to be recorded for C Ltd.
(i)
You are required to determine tangible capital employed as under:
(a) Shareholders’ Funds Approach for A Ltd.
(b) Equity Funds Approach for B Ltd. and
(c) Long Term Funds Approach for C Ltd.
(ii)
Value the equity share of each company as per Net Assets Method. Consider
goodwill in the balance sheet as a fair value of goodwill of each company.
(12 Marks)
Q2
(a)
Judge, on the basis of following information, the capitalization rate for Companies X
and Y, when for the industry as a whole it is 9%.
Dividend Rates for Past 5
years
Intrinsic Value per Share
Face value per share
Future Plans
Company X
Company Y
40%, 5%, 25%, 10%, 20% 13%, 16%, 17.5%; 17.5%, 17.5%
Rs.175
Rs.100
None
Rs.300
Rs.100
Expanding capacity by 50%
Value shares as per dividend yield method and fair value method.
(b)
(5 Marks)
From the following information determine the possible value of brand as per
Potential Earnings Model:
Amount
(Rs. in lakhs)
Profit before tax
13.00
Income Tax
3.00
Tangible Fixed Assets
20.00
Identifiable Intangibles other than brand
10.00
Expected return on tangible fixed assets
6.00
Appropriate capitalization factor for intangibles is 25%.
Q3
(3 Marks)
The Balance sheet of Samna Ltd. as at 31-12-12 were as follows:
Liabilities
Share Capital:
50,000 Equity shares of Rs 10
each fully paid
2,000 8% Pref. Shares of Rs
100 each fully paid
Reserves & Surplus:
Capital Reserve
General Reserve
Secured loan:
6% Mortgage Debentures
Creditors
Bills Payables
Rs Assets
Rs
Fixed assets:
Goodwill
10,000
5,00,000 Land and building
1,50,000
Plant and machinery
3,50,000
2,00,000 Investments:
5% government securities at
1,00,000 cost [Face value Rs 40000]
50,000
50,000 Current Assets:
3,00,000
Stock
1,00,000 Debtors
2,00,000
1,50,000 Cash at bank
50,000
10,000
11,10,000
11,10,000
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The assets were revalued as: Land and building Rs 1,00,000; Plant and Machinery
Rs 4,50,000. The normal rate of return on closing capital employed for valuation of
Goodwill is 10%. Goodwill should be valued on the basis of 3 years purchase of the
super profits of the company. The average annual profits of the company are Rs
1,06,000. 40% of the money invested in Building is treated as non-trading assets;
because rent of Rs 10,000 is collected from the Building annually. You are required
to compute the value of each equity share. Ignore taxation and depreciation. Use
long-term fund approach to value goodwill.
(10 Marks)
(Assessed answer papers shall be returned latest by 28th November 2015)
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Solution of Test of Valuations
Conducted on 17th November 2015
Q1
(i) Determination of Tangible Capital Employed:
Plant and Machinery
Furniture and Fittings
Trade Investments:
Stock
Debtors
Bills Receivables
Cash
Less:
Creditors
12.5 % Term Loan
13% Debentures
Preference Capital
Capital Employed
A Ltd.
B Ltd.
C Ltd.
5,00,000
2,50,000
8,00,000
80,000
1,26,000
2,50,000
10,000
20,16,000
3,00,000
1,70,000
----1,00,000
65,000
20,000
10,000
6,65,000
3,00,000
1,00,000
----1,80,000
85,000
----10,000
6,75,000
2,00,000
------------18,16,000
2,50,000
----1,00,000
1,25,000
1,90,000
1,00,000
------------5,75,000
(5 Marks)
(ii) Determination of Equivalent Shares in terms of Rs.100:
Rs.100 face value
Rs.50 face value
A Ltd.
B Ltd.
C Ltd.
10,000
5,000
15,000
8,000
2,000
10,000
5,000
1,000
6,000
(2 Marks)
Determination of Value of Equity Share as per Net Assets Method:
Capital Employed
Add:
Goodwill
Non Trade Investments
Less:
12.5 % Term Loan
13% Debentures
Preference Capital
Net Assets to Equity Shareholders
Equivalent Equity Shares
Value per share for Rs.100 face value
Rs.50 face value
A Ltd.
B Ltd.
C Ltd.
18,16,000
1,90,000
5,75,000
2,50,000
75,000
21,41,000
5,80,000
4,80,000
12,50,000
4,50,000
----10,25,000
--------2,00,000
19,41,000
15,000
129.40
------------12,50,000
10,000
125.00
50,000
80,000
75,000
8,20,000
6,000
136.67
129.40
64.70
125.00
62.50
136.67
68.33
(5 Marks)
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Q2
(a)
Valuation of Shares as per Dividend Yield Method:
Company X:
Dividends are not showing any definite trend. Hence, simple average dividend rate is
determined, which is 20%.
Benchmark is 9% but for fluctuating dividend track record, the NRR is increased to
10%. Higher NRR is also justified given the fact that the company has no concrete
future plans as well.
Value per share = (20 / 10) X 100 = Rs.200
(2 Marks)
Company Y:
Dividends are showing definite increasing trend. Hence, weighted average is
determined, which is –
13 (1) + 16 (2) + 17.5 (3) + 17.5 (4) + 17.5 (5) / 15 = 17 %
Benchmark is 9% but for superior dividend track record, the NRR is decreased to
8.5%. Lower NRR is also justified given the fact that the company has concrete
future plans of expansion as well.
Value per share = (17 / 8.5) X 100 = Rs.200
(2 Marks)
Valuation of Shares as per Fair Value Method:
Company X:
Value per share = 175 + 200 / 2 = Rs.187.5
Company Y:
Value per share = 300 + 200 / 2 = Rs.250
(1 Mark)
(b)
Determination of the Value of Brand:
Amount
(Rs. in lakhs)
Profit before tax
13.00
Less: Tax
3.00
Profit after tax
10.00
Less: PAT attributable to tangible fixed assets
6.00
PAT attributable to intangible fixed assets
4.00
÷ Capitalisation rate
25 %
Value of intangibles including brand
16.00
Less: Value of intangible other than brand
10.00
Value of Brand
6.00
(4 Marks)
Solution prepared by
CA Ashish Lalaji
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Q3
Calculation of Closing Capital Employed:
Land and Building [1,00,000 X 60%]
Plant and Machinery
Stock
Debtors
Cash at bank
Less: Creditors
Bills Payables
Closing Capital Employed
60,000
4,50,000
3,00,000
2,00,000
50,000
10,60,000
1,50,000
10,000
9,00,000
(3 Marks)
Calculation of Average Future Maintainable Profit [FMP]:
Profit as given
Less: Income from Non-trade Investments
[40,000 X 5%]
Rent from building
1,06,000
2,000
10,000
94,000
6,000
1,00,000
Add: Debenture interest*
* Question demands use of Long-term Fund Approach
to value goodwill i.e. from view-point of Shareholders
as well as long-term debt providers. Hence, debenture
interest is added back in above calculation.
(3 Marks)
Valuation of Goodwill as per Super Profits Method:
Average FMP
Less: Normal Profits [9,00,000 X 10%]
Super Profits
X No. of years of purchase
Goodwill
1,00,000
90,000
10,000
3
30,000
(1 Marks)
Valuation of Share as per Net Assets Method:
Closing capital employed
Add: Goodwill
Non-trade building [1,00,000 X 40%]
Non-trade investments
Less: 6% Debentures
8% Preference share capital
(a) Net assets to equity shareholders
(b) No. of equity shares
Value per equity share
9,00,000
30,000
40,000
50,000
10,20,000
1,00,000
2,00,000
7,20,000
50,000
14.40
(3 Marks)
Solution prepared by
CA Ashish Lalaji
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