Page 285 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes Rate of Dividend
Distributable Profits for Dividend 80% of ` 1,00,000 50% of ` 1,00,000

` 80,000 ` 50,000
Paid up Share Capital ` 4,00,000 ` 4,00,000

Rate of Dividend 80,000 ×100 50,000 ×100
4,00,000 4,00,000
= 20% = 12.5%

Rateof Dividend 12.5
Market Value per Share = × Paid up Value of Share = 20 ×100 = ×100
NormalRate 12 8.5
= ` 166.67 = ` 147.06
Illustration 8 (valuation of Shares on the Basis of Actual Rate of Earning)

From the following information, calculate the value of equity shares:
(i) 4,000; 4% Preference shares of ` 100 each fully paid: ` 4,00,000
(ii) 5,000 Equity Shares of ` 100 each, ` 80 per share paid up ` 4,00,000
(iii) Expected Profit per year (before tax) – ` 2,50,000

(iv) Income Tax Rate – 50%
(v) Normal Rate of Earning – 10%
(vi) Transfer to General Reserve – 20% of profit
Solution
Calculation of Profits Available for Dividends to Equity Shareholders:

`
Expected Profits per year before tax 2,50,000

Less: 50% Income Tax 2,50,000 ×50 1,25,000
100
Profit After Tax (PAT) 1,25,000

Less: 20% of Profit transfer to General Reserve 25,000
Profits Available for Dividends 1,00,000
Less: Preference share Dividend @ 4% on ` 4,00,000 16,000
Profits Available for Equity Dividend 84,000
Actual Rate of Earning

ProfitsAvailableforEquityDividend
= ×100
PaidupEquityShareCapital
84,000
= × 100
4,00,000

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