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CMA Final · Strategic Performance Management and Business Valuation · Fundamentals of Business Valuation

Aarav Engineering Ltd has 10 lakh equity shares. Its net assets (fully revalued, net of all liabilities) are Rs 900 lakh. Its average maintainable profit is Rs 180 lakh and the normal rate of return in the industry is 15%. Under the capitalisation of profits method, what is the value per share, and how does it compare with the net asset value per share?

The value is Rs 120 per share, higher than net asset value of Rs 90. Maintainable profit of Rs 180 lakh capitalised at 15% gives Rs 1,200 lakh, which divided by 10 lakh shares is Rs 120, against Rs 900 lakh of net assets, or Rs 90 per share.

  1. ARs 120 per share, higher than the net asset value per share of Rs 90Correct
  2. BRs 120 per share, lower than the net asset value per share of Rs 90
  3. CRs 90 per share, equal to the net asset value per share
  4. DRs 150 per share, higher than the net asset value per share of Rs 90

Explanation

Capitalised value = 180/0.15 = Rs 1,200 lakh; per share = 1,200/10 = Rs 120. Net asset value per share = 900/10 = Rs 90. So the capitalised value is higher, indicating goodwill of Rs 300 lakh. Rs 150 would wrongly use a 12% rate.

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