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    58 Method of Valuation of Goodwill

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    rahul_mhabde20059812
    The document discusses four methods for valuing goodwill: average profit method, super profit method, capitalization method, and annuity method. It also provides guidance on calculating the key inputs needed for each method, including fair maintainable profits, capital employed, normal rate of return, and number of years purchase. The document outlines how to calculate these values, such as using projected profits to determine fair maintainable profits, taking the average of opening and closing balances to determine capital employed, and using dividend yield or return on equity to calculate normal rate of return. It notes that the number of years purchase may need to be assumed if not provided.

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    58 Method of Valuation of Goodwill

    Uploaded by

    rahul_mhabde20059812
    523 views12 pages
    The document discusses four methods for valuing goodwill: average profit method, super profit method, capitalization method, and annuity method. It also provides guidance on calculating the key inputs needed for each method, including fair maintainable profits, capital employed, normal rate of return, and number of years purchase. The document outlines how to calculate these values, such as using projected profits to determine fair maintainable profits, taking the average of opening and closing balances to determine capital employed, and using dividend yield or return on equity to calculate normal rate of return. It notes that the number of years purchase may need to be assumed if not provided.

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    The document discusses four methods for valuing goodwill: average profit method, super profit method, capitalization method, and annuity method. It also provides guidance on calculating the key inputs needed for each method, including fair maintainable profits, capital employed, normal rate of return, and number of years purchase. The document outlines how to calculate these values, such as using projected profits to determine fair maintainable profits, taking the average of opening and closing balances to determine capital employed, and using dividend yield or return on equity to calculate normal rate of return. It notes that the number of years purchase may need to be assumed if not provided.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as ppt, pdf, or txt
    523 views12 pages

    58 Method of Valuation of Goodwill

    Uploaded by

    rahul_mhabde20059812
    The document discusses four methods for valuing goodwill: average profit method, super profit method, capitalization method, and annuity method. It also provides guidance on calculating the key inputs needed for each method, including fair maintainable profits, capital employed, normal rate of return, and number of years purchase. The document outlines how to calculate these values, such as using projected profits to determine fair maintainable profits, taking the average of opening and closing balances to determine capital employed, and using dividend yield or return on equity to calculate normal rate of return. It notes that the number of years purchase may need to be assumed if not provided.

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    of 12

    Valuation of Share & Goodwill

    www.safeEcollege.com 1
    Method of Valuation of Goodwill

    Average Profit Method :

    = Future Maintainable Number of Year


    profits * Purchase

    = FMP * NYP

    www.safeEcollege.com 2
    Super Profit Method :

    = FMP - Capital Employed * NRR * NYP

    Normal Profit

    Super Profit

    NRR = Normal Rate of Return


    www.safeEcollege.com 3
    Capitalization Method :

    FMP - Closing Capital


    NRR Employed

    Annuity Method :

    = Super Profit * NYP at Present Value

    www.safeEcollege.com 4
    Calculation of Following values are Required :

    1. Fair Marketable Profit ( FMP)


    2. Capital Employed
    3. Normal Rate of Return ( NRR)
    4. Number of Year Purchase

    www.safeEcollege.com 5
    Calculation on FMP

    It can be calculated by Applying

    1. Projected Profit Method ( 1st Preference)

    2. Past Profit Method

    www.safeEcollege.com 6
    How to Apply Projected Profit Method ?

    Under this method, Projection of sale, COGS & Expense is


    made.

    Profit is calculated based on such projections.

    This is 1st Preference

    www.safeEcollege.com 7
    Calculation of Capital Employed

    Sundry Assets ******


    Less: Sundry Liability ******
    Capital Employed =====

    Notes :
    1. Sundry Assets/ Liability should be excluding :

    • Goodwill
    • Non Trade Investment
    • Proposed Dividend
    • Preference Share capital is not Liability, hence not taken above.
    www.safeEcollege.com 8
    2. Sundry Asset / Liability should be after :
    • Rectification of Errors
    • Revaluation
    • As per new policy

    3. Tangible Capital means Closing Capital.

    www.safeEcollege.com 9
    4. Capital Employed should be taken on Average Basis
    as follows :

    How Average is
    to be taken

    Question is silent about Question is silent about


    Question specify Avg. Capital, but multiple Avg. Capital, but multiple
    Average Capital Employed
    B/s are given B/s are not given

    FMP on WAAP FMP on SAAP


    Consider Average Consider Average Consider Avg. Capital
    Consider
    Closing cap. – ½ of rectified PAT
    Closing Stock
    www.safeEcollege.com 10
    Calculation of NRR (Normal Rate of Return)

    Dividend
    = * 100
    Market Price

    Dividend Rate * Paid up Share Capital


    =
    Market Price

    www.safeEcollege.com 11
    4. Calculation of NYP

    It cannot be calculated if NYP is missing,


    hence use capitalization method.

    If Question require Super Profit Method but


    NYP is missing, assume NYP from 3 – 5 Year.

    www.safeEcollege.com 12

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