CS Professional · Corporate Restructuring, Valuation and Insolvency · Planning and Strategy
During financial due diligence of Rajan Auto Components Ltd, the acquirer's team notes that the target's reported profit includes a one-time gain of ₹2 crore from sale of land. Reported profit is ₹9 crore and the acquirer values the business at 8 times maintainable earnings, ignoring tax effects. What is the value based on maintainable earnings?
The value is ₹56 crore. Normalising reported profit of ₹9 crore by removing the one-time ₹2 crore land gain gives maintainable earnings of ₹7 crore, and applying the multiple of 8 yields ₹56 crore. Using unadjusted profit would overstate value.
- A₹72 crore
- B₹88 crore
- C₹56 croreCorrect
- D₹16 crore
Explanation
Maintainable earnings = 9 − 2 = ₹7 crore after removing the non-recurring land gain. Value = 7 × 8 = ₹56 crore. Using reported profit gives ₹72 crore, which wrongly capitalises a one-off gain.
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