CA Final · Advanced Financial Management · Business Valuation

Iyer Pharma Ltd's net assets (excluding goodwill) at fair value are ₹80,00,000, with 4,00,000 equity shares. Average maintainable profit after tax is ₹14,00,000, which includes a one-off gain of ₹2,00,000 each year that will not recur, and it is before deducting ₹1,00,000 of additional annual depreciation arising from the fair value uplift of assets. Normal rate of return is 10%. Goodwill is valued under the super-profit method at 3 years' purchase. What is the value per share including goodwill?

The value is ₹22.25 per share. Adjusted profit is ₹11,00,000 after removing the one-off gain and extra depreciation. Normal profit is ₹8,00,000, so super profit is ₹3,00,000 and goodwill at three years is ₹9,00,000. Adding this to ₹80,00,000 gives ₹89,00,000 over 4,00,000 shares.

A₹22.25Correct
B₹20.00
C₹21.75
D₹23.00

Explanation

Adjusted profit = 14,00,000 - 2,00,000 - 1,00,000 = 11,00,000. Normal profit = 10% of 80,00,000 = 8,00,000. Super profit = 3,00,000; goodwill at 3 years = 9,00,000. Equity value = 89,00,000; per share = 89,00,000/4,00,000 = ₹22.25. Missing the depreciation adjustment would give ₹23.00 through a 4,00,000 super profit... and ignoring the one-off gain would overstate value.

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