Page 287 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes
Market Value per Share = ActualRateof Earning × PaidupCapitalof aShare × Paid up Capital
of a Share NormalRate

18.88
= × 100 = ` 188.8
10
Alternatively, if debentures are not included in the effective capital employed:
Total Assets 30,00,000
Less: Non-Trading Assets 5,00,000
25,00,000
Less: External Liabilities

Debentures 10,00,000
Other Liabilities 2,50,000 12,50,000
Effective Capital Employed 12,50,000
Actual Rate of Earning:

Actual Average Profits after Interest but Before Tax 6,50,000
Less: 50% Income Tax 3,25,000
Profit After Tax 3,25,000

3,25,000
Actual Rate of Earning = × 100 = 26%
12,50,000
26
Market Value per Share = × 100 = ` 260
10
Illustration 10 (Valuation by Capitalisation of Profits Method)
Two companies, X Ltd. and Y Ltd. are assumed to be exactly similar, to only as to assets, liabilities
and reserves but also as to all other factors, except that the arrangement of the Share Capital
differs. The share capital of X Ltd. is ` 31,50,000 divided into 30,000; 6% Preference Shares of
` 100 each and 1,500 equity shares of ` 100 each fully paid up. The share capital of Y Ltd. is
` 31,50,000, divided into 3,000; 6% Preference Shares of ` 100 each and 28,500 Equity Shares of
` 100 each fully paid up. The equity shares of the companies may be taken to represent a somewhat
speculative industrial risk and the market yield is 8%. The companies’ profits and distributions
are:
Year `
2009 3,00,000
2010 4,00,000
Estimate the approximate probable price of the equity shares of the companies ignoring all facts
other than mentioned above.

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