Page 283 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes

Notes Actual Rate of Earning is also known as Earning Method.

(c) Valuation of Shares Based on Capitalisation of Divisible Profits: Under this method,
actual rate of earning or rate of dividend is computed as explained earlier. But profits
available for distribution to equity shareholders or average future maintainable profits are
capitalised on the basis of normal rate of capitalisation or return and profit will be calculated
as explained in the last two methods. The following formula is adopted to capitalise the
profits-

Profits Available for Distribution
Capitalised Value of Profits = × 100
Normal Rate of Capitalisation or Return
To determine the value of the share, any one of the following methods can be used–
Capitalised value of profits is divided by the number of equity shares to ascertain the value
of share – (if there are only one type of shares having same paid up value of shares)

Capitalise Value of Profits
Value of Share =
No. of Equity Shares
The capitalised value of profits is divided by the paid up equity share capital. The result
will be the value of rupee one paid up share and this will be multiplied by the paid up
value of the share to ascertain the market value of the share under capitalisation of profit
method. (Generally this method is adopted in that condition where the different paid up
amounts of the various types of shares are given).

Value of Share = Capitalise Value of Profits ×Paid-up Value of a Share
Paid-up Equity Shares Capital

Illustration 6 (valuation Based on Rate of Dividend)
Calculate the value of equity share 1,000; 14% Preference Shares of ` 100 each. 20,000 Equity
Shares of ` 10 each.
Annual Profits ` 1,90,000, ` 2,10,000, ` 2,05,000 and ` 2,15,000, in 2007, 2008, 2009, and 2010
respectively.

Rate of Tax 50%
General Reserve Transfer = 20% of profits
Normal Rate = 20%
Solution
Profits `

2007 1,90,000
2008 2,10,000
2009 2,05,000
2010 2,15,000
Total Profits of 4 years 8,20,000

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