Page 289 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

Notes value of the share. It is considered the most appropriate method. For this method, the following
formula is used–
+
Fair Value of the Share = Intrinsic Valueof theShare Marketor Yield Valueof theShare
2
To find out the intrinsic value of the share and market or yield value of the share, the Net Assets
Valuation Method and Earning Basis Valuation Method are applied respectively. These methods
have been elaborated earlier.

Notes Fair Value Method is also known as Dual Method.

Illustration 11 (Fair value of the Shares)

From the information given below and the Balance Sheet of A Ltd. on 31 December, 2010, find
st
out the value of its equity shares by the Dual Method (appropriate basis):
(a) Company’s prospects for 2011 are good.
(b) Buildings are now worth ` 7,00,000.

(c) Profits for the last three years have shown an annual increase of ` 50,000. The annual
transfer to reserve is 25% of the net profit.
(d) Preferential shares are preferential as to capital and dividend and;

(e) Normal rate of return expected is 15%.

Balance Sheet
Liabilities ` Assets `
2,000; 8% Preferential Shares of ` 100
each fully paid 2,00,000 Buildings 1,40,000
8,000 Equity Shares of ` 100 each fully paid 8,00,000 Furniture 6,000
Reserve and Surplus: Stock (market value) 9,00,000

Profit and Loss Account 3,00,000 Investments at cost 6,70,000
Balance on 1.1.2010 1,60,000 (Face value ` 8,00,000)
Add: Profits for 2010 8,60,000 10,20,000 Debtors 5,60,000
(before transfer to reserve) Bank 1,20,000
Creditors 96,000 Preliminary Expenses 20,000
24,16,000 24,16,000
Solution
Valuation of Shares by Assets Valuation Method–

`
Building 7,00,000
Furniture 6,000
Stock (market value) 9,00,000
Investments 6,70,000

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