CMA Final · Strategic Performance Management and Business Valuation · Valuation of Assets and Liabilities
A company values a brand using the relief-from-royalty method. Expected brand-related sales are ₹50 crore each year in perpetuity, the market royalty rate is 4%, the tax rate is 25%, and the discount rate is 10%. Ignoring growth, what is the brand value?
Royalty saved is 4% of ₹50 crore, equal to ₹2 crore; after 25% tax it is ₹1.5 crore. Capitalised at 10% in perpetuity, the brand value is ₹15 crore.
- A₹20 crore
- B₹15 croreCorrect
- C₹5 crore
- D₹1.5 crore
Explanation
Pre-tax royalty saved = 50 x 4% = ₹2 crore. After tax = 2 x 0.75 = ₹1.5 crore. Perpetuity value = 1.5 / 0.10 = ₹15 crore. Ignoring tax gives ₹20 crore.
Did you get it right without looking?
One question tells you little. A timed set on Valuation of Assets and Liabilities shows your real accuracy, how long you take and where you lose marks.
More Valuation of Assets and Liabilities questions
- Under the replacement cost approach to valuing a machine, which adjustment is made to the current cost of acquiring an identical new machine…
- Meridian Textiles Ltd holds a patented weaving process expected to generate incremental after-tax cash flows of ₹40 lakh in each of the next…
- A manufacturing firm values its stock of finished goods for a valuation exercise. The cost of the goods is ₹8,00,000, the estimated selling …
- Kaveri Textiles has a machine whose replacement cost new is Rs 50,00,000. Its total expected life is 10 years, and 4 years have elapsed. Str…
- Under the replacement cost approach to valuing an asset, which of the following best describes the value arrived at?
- Rohit Steels has a 6-year-old plant with original cost ₹60 lakh, original life 10 years. Current replacement cost of a new identical plant i…