Corporate Accounting and Financial Management · Related Aspects of Company Accounts

Valuation of Goodwill and Shares: Methods and Problems

Updated 11 October 2026 · Fact-checked

Goodwill is valued by average profit, super profit or capitalisation methods. Shares are valued by the net asset method, the yield method, or fair value (the average of the two). To solve a problem, find maintainable profit, adjust it, then apply the method the question names.

Understand Valuation of Goodwill and Shares

Goodwill is the extra value a business earns because of its name, location, customers and skill. It is an intangible asset. You cannot see it, so you value it from the profits the business earns above a normal level.

You value goodwill when a partner is admitted, a business is sold, or two companies merge. The idea is simple. If a firm earns more than normal firms in its industry, a buyer will pay extra for that edge.

There are three common methods. The average profit method takes some years of average profit and multiplies it by a number of years' purchase. The super profit method values only the profit above normal. The capitalisation method asks how much capital would be needed to earn the profit at the normal rate, then compares it with the actual capital employed.

Shares are valued because market price may not show true worth, especially for unlisted companies. The net asset method (intrinsic value) divides net assets available to equity holders by the number of equity shares. The yield method values a share from the return it earns compared with the return investors expect. Fair value is commonly taken as the average of the net asset value and the yield value.

For valuations a company needs under the Companies Act, 2013, section 247 says the work must be done by a registered valuer appointed by the audit committee, or by the Board if there is none. The valuer must be impartial, exercise due diligence and must not value assets in which he has an interest.

Dividend rules matter for yield. Section 123 says dividend is paid out of profits after providing depreciation, so profit used for valuation should also reflect proper depreciation. Section 198 helps you see what counts as profit: capital profits and unrealised gains are excluded, and usual working charges and interest are deducted.

Key rules to remember

Average profit: Average maintainable profit = Σ adjusted profits ÷ number of years; Adjust each year's profit for abnormal items, and for any change in remuneration, before averaging.
Goodwill by average profit method: Goodwill = Average profit × number of years' purchase; The number of years is given in the question.
Normal profit: Normal profit = Capital employed × normal rate of return ÷ 100; Capital employed is usually net assets, excluding goodwill and non-trading assets.
Super profit: Super profit = Average (maintainable) profit − Normal profit; If the result is zero or negative, goodwill by this method is nil.
Goodwill by super profit method: Goodwill = Super profit × number of years' purchase; Used when the question says to purchase super profit for some years.
Goodwill by capitalisation of super profit: Goodwill = Super profit × 100 ÷ normal rate of return; Treats super profit as a perpetual stream.
Goodwill by capitalisation of average profit: Capitalised value = Average profit × 100 ÷ normal rate; Goodwill = Capitalised value − Capital employed; Both methods give the same answer when the same capital employed and normal rate are used.
Net asset (intrinsic) value per share: Value per share = (Assets − outside liabilities − preference capital) ÷ number of equity shares; Use real values of assets. Include goodwill only if it is valued.
Yield value per share: Value per share = (Expected rate of earning ÷ Normal rate of return) × paid-up value per share; Expected rate is profit available to equity ÷ paid-up equity capital × 100.
Fair value per share: Fair value = (Net asset value + Yield value) ÷ 2; Use this only when the question asks for fair value or an average of the two.

How to solve Valuation of Goodwill and Shares questions

Follow the same order for every goodwill or share valuation question. It stops you from missing adjustments.

1Read which method the question asks for, and note the normal rate, the years' purchase and the paid-up capital.
2Adjust each year's profit. Remove abnormal gains and losses, capital items and unrealised gains. Deduct items that should have been charged, such as proper depreciation, interest and directors' remuneration.
3Find the average or maintainable profit. Use a simple average unless weights are given.
4For goodwill, find capital employed by taking assets at fair values, less outside liabilities. Exclude goodwill and non-trading assets such as investments.
5Compute normal profit, then super profit, then apply the years' purchase or the capitalisation formula.
6For shares, find net assets available to equity holders, divide by the number of equity shares, and separately compute the yield value if asked.
7Take the average of the two values if fair value is asked, and then compute the value of the holding if a number of shares is given.
8Write the final value with the unit (₹ per share or ₹ total) and show every working line.

Quickest way: Super profit shortcut

When to use it: Use when the question gives average profit, capital employed and normal rate, and asks for goodwill by any super profit method.

Write: normal profit = capital employed × rate.
Subtract it from average profit to get super profit.
Multiply by the years' purchase, or by 100 ÷ rate for capitalisation.
For shares, compute net asset value first, as it needs no rate, then yield value as a ratio of two rates.

Common mistakes in Valuation of Goodwill and Shares

Including goodwill or fictitious assets in capital employed.
Students copy the whole balance sheet total.
Fix: Take only real trading assets at fair value, less outside liabilities. Leave out goodwill, preliminary expenses and non-trading investments.
Not adjusting profits for abnormal items before averaging.
Students rush to the formula.
Fix: Scan each year for one-time gains, losses, capital profit and changes in remuneration. Adjust first, then average.
Treating a negative super profit as negative goodwill.
Students apply the formula mechanically.
Fix: If average profit is below normal profit, goodwill by the super profit method is nil.
Deducting preference capital twice or forgetting it in net asset value.
Students mix up the equity and total capital.
Fix: Deduct outside liabilities and preference share capital (with arrears if due) before dividing by equity shares.
Using total capital instead of paid-up equity in the yield method.
The expected rate needs equity capital only.
Fix: Expected rate = profit available to equity ÷ paid-up equity capital × 100. Deduct preference dividend first.
Calling the average of intrinsic and yield value 'intrinsic value'.
The terms sound alike.
Fix: Intrinsic value is the net asset value. Fair value here is the average of net asset and yield values.

Worked examples

Example 1

A company's adjusted profits for three years are ₹1,80,000, ₹2,10,000 and ₹2,40,000. Capital employed is ₹12,00,000 and the normal rate of return is 10%. Find goodwill at 3 years' purchase of super profit, and by capitalisation of super profit.

Show the solution

Average profit = (1,80,000 + 2,10,000 + 2,40,000) ÷ 3 = 6,30,000 ÷ 3 = ₹2,10,000.
Normal profit = 12,00,000 × 10% = ₹1,20,000.
Super profit = 2,10,000 − 1,20,000 = ₹90,000.
Goodwill at 3 years' purchase = 90,000 × 3 = ₹2,70,000.
Capitalisation of super profit = 90,000 × 100 ÷ 10 = ₹9,00,000.

Answer: Goodwill is ₹2,70,000 at 3 years' purchase of super profit, and ₹9,00,000 by capitalisation of super profit.

Example 2

A company has 10,000 equity shares of ₹100 each fully paid and 2,000 8% preference shares of ₹100 each. Net assets before preference capital are ₹18,00,000. Profit available after tax and before preference dividend is ₹3,16,000. Normal rate of return on equity is 12%. Find the net asset value, yield value and fair value per equity share.

Show the solution

Preference capital = 2,000 × 100 = ₹2,00,000.
Net assets for equity = 18,00,000 − 2,00,000 = ₹16,00,000.
Net asset value per share = 16,00,000 ÷ 10,000 = ₹160.
Preference dividend = 8% × 2,00,000 = ₹16,000.
Profit for equity = 3,16,000 − 16,000 = ₹3,00,000.
Paid-up equity capital = 10,000 × 100 = ₹10,00,000.
Expected rate = 3,00,000 ÷ 10,00,000 × 100 = 30%.
Yield value per share = 30 ÷ 12 × 100 = ₹250.
Fair value = (160 + 250) ÷ 2 = ₹205.

Answer: Net asset value is ₹160, yield value is ₹250 and fair value is ₹205 per equity share.

Exam tips

Write the formula before substituting. Marks are given for method even if arithmetic slips.
Show the adjusted profit working in a neat table. Examiners check each adjustment separately.
State your assumption in one line when the question is silent, such as taking assets at book value.
For legal valuation questions, state that a registered valuer appointed by the audit committee or Board must value under section 247, and then give the conclusion.

Practice questions from Related Aspects of Company Accounts

Valuation of Goodwill and Shares in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Valuation of Goodwill and Shares: frequently asked questions

What is the difference between intrinsic value and fair value of shares?

Intrinsic value is the net asset value per share, found from the real worth of assets less liabilities. Fair value, as taught here, is the average of net asset value and yield value. Fair value therefore blends asset backing with earning power.

How do you calculate goodwill by the super profit method?

Find average maintainable profit and subtract normal profit, which is capital employed times the normal rate. The result is super profit. Multiply it by the given years' purchase to get goodwill.

When is the yield method used for valuing shares?

It is used when an investor holds a minority stake and cares about returns, not control of assets. It compares the expected rate of earning on paid-up capital with the normal rate.

Who can value assets under the Companies Act, 2013?

Section 247 requires a registered valuer, appointed by the audit committee or by the Board if there is no committee. The valuer must be impartial, use due diligence and avoid assets in which he has an interest.