Page 280 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 12: Valuation of Shares

Solution Notes

Valuation of Shares of Small Ltd.
Net Assets `
Fixed Assets revalued 4,20,000
Goodwill 30,000

Sundry Debtors 90,000
Inventory 1,20,000
Cash and Bank Balance 90,000
7,50,000

Less: Liabilities:
Sundry Creditors 1,70,000
Net Assets of Small Ltd. 5,80,000
5,80,000
Value of one equity share of Small Ltd. = = ` 19.33
30,000
As Big Ltd. has investment, in the shares of Small Ltd. i.e., 75% of 30,000 shares or 22,500
shares.
The value of investments of Big Ltd. (value of 22,500 shares in Small Ltd.)
= 22,500 × ` 19.33 = ` 4,34,925

Valuation of Shares of Big Ltd.
Net Assets: `

Fixed Assets 9,50,000
Investment (calculated as above) 4,34,925
Sundry Debtors 3,60,000
Inventory 3,10,000
Cash and Bank Balance 2,30,000

22,84,925
Less: External Liability:
Sundry Creditors 1,00,000
Net Assets of Big Ltd. 21,84,925

21,84,925
Value of one equity share of Big Ltd. = = ` 24.28
90,000
12.5.2 Earning Basis Method

Shareholders (investors) invest their money to earn a profit. Therefore, according to the earning,
they prepare themselves to pay the amount for investment. If the rate of earning is higher,
investors will be ready to pay the higher price for the investment (shares). On the other hand,
if investment yields the lower rate of return, accordingly its value will be lower. Thus, in the

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