Page 284 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 12: Valuation of Shares

8,20,000 Notes
Average Annual Profits = = ` 2,05,000
4
×
Less: 50% income tax 2,05,000 50 1,02,500
100
Profit after tax (PAT) 1,02,500
Less: 20% Transfer to General Reserve 20,500
Amount available for dividend 82,000
Less: Preference Dividend @ 14% on ` 1,00,000 14,000

Profits Available for Equity Dividend 68,000

Profit Available for Equity Dividend
Rate of Dividend = × 100
Equity Paidup Capital

68,000
= × 100 = 34%
2,00,000
Normal Rate of Return is given 20%

Dividend Rate
Value of an equity share = × Paidup Value of a Share
Normal Rate of Return
34
= × 10 = ` 17
20
Illustration 7 (Necessary Adjustments in Normal rate of Return)

Ranu Ltd. and Sanu Ltd. earn an annual profits of ` 2,00,000 each. Each of their share capital
consists of 8,000 shares of ` 100 each fully paid up. Ranu Ltd. distributes 80% of its profits as
dividend, while Sanu Ltd. distributes only 50%. Normal rate of return is 10%. The following
further information is available:
(i) Transfer of Shares of Ranu Ltd. is restricted.
(ii) Net Tangible Assets of Ranu Ltd. are ` 10,00,000 and that of Sanu Ltd. ` 24,00,000.

Make the necessary adjustments in the normal rate of return and ascertain the market value of
the shares of both the companies.

Solution

Adjusted Normal Rate of Return
Ranu Ltd. Sanu Ltd.
Normal Rate of Return (given) 10% 10%
Adjustment for the restriction on the transfer of shares + 0.5% —

Adjustment for Net Tangible Assets backing + 1% – 1%
Adjustment for Financial prudence (transfer to reserve) + 0.5% – 0.5%
Adjusted Normal Rate of Return 12% 8.5%

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