Advanced Financial AccountingTU Board 2080
a. MM Company with issued capital of Rs.500,000 @ Rs.100 each provided you the following information: Particulars Rs. : : Fixed Assets 500,000 Current Assets 250,000 Goodwill 50,000 Current…
10a. MM Company with issued capital of Rs.500,000 @ Rs.100 each provided you the following information:
| Particulars | Rs. |
|---|---|
| Fixed Assets | 500,000 |
| Current Assets | 250,000 |
| Goodwill | 50,000 |
| Current Liabilities | 160,000 |
| 10% Debenture | 120,000 |
Net profit for the year was Rs.50,000 out of which 25% was transferred to reserve. Normal rate of return was 12%.
Required: Value of each equity shares under i) Net assets method ii) Yield method (2.5+2.5)
b. Differentiate between profit and non-profit organization. (5)
Answer
a. Valuation of Equity Shares
i) Net Assets Method
The net assets method values shares based on the company’s net assets (total assets minus total liabilities).
Step 1: Calculate Total Assets
- Fixed Assets = Rs. 500,000
- Current Assets = Rs. 250,000
- Goodwill = Rs. 50,000 Total Assets = Rs. 500,000 + Rs. 250,000 + Rs. 50,000 = Rs. 800,000
Step 2: Calculate Total Liabilities
- Current Liabilities = Rs. 160,000
- 10% Debenture = Rs. 120,000 Total Liabilities = Rs. 160,000 + Rs. 120,000 = Rs. 280,000
Step 3: Calculate Net Assets Net Assets = Total Assets – Total Liabilities = Rs. 800,000 – Rs. 280,000 = Rs. 520,000
Step 4: Calculate Number of Shares Issued Capital = Rs. 500,000 @ Rs. 100 per share Number of Shares = Rs. 500,000 / Rs. 100 = 5,000 shares
Step 5: Calculate Value per Share Value per Share = Net Assets / Number of Shares = Rs. 520,000 / 5,000 = Rs. 104 per share
ii) Yield Method
The yield method values shares based on the expected return (dividend yield).
Step 1: Calculate Earnings Available for Equity Shareholders Net Profit = Rs. 50,000 25% transferred to reserve = Rs. 12,500 Earnings Available for Equity Shareholders = Rs. 50,000 – Rs. 12,500 = Rs. 37,500
Step 2: Calculate Expected Dividend per Share Normal rate of return = 12% Expected Dividend per Share = (Earnings Available / Number of Shares) × Normal Rate = (Rs. 37,500 / 5,000) × 12% = Rs. 7.5 × 12% = Rs. 0.90 per share
Step 3: Calculate Value per Share Value per Share = Expected Dividend / Market Rate of Return Assuming market rate = 12% (same as normal rate) Value per Share = Rs. 0.90 / 12% = Rs. 7.50 per share
Note: If the market rate differs, adjust accordingly. Here, assuming Rs. 7.50 per share under the yield method.
b. Difference Between Profit and Non-Profit Organizations
| Feature | Profit Organization | Non-Profit Organization |
|---|---|---|
| Primary Objective | Maximize profits for owners/shareholders | Serve society, provide social benefits |
| Ownership | Private individuals or shareholders | Trustees, members, or government |
| Distribution of Surplus | Dividends, bonuses, or retained earnings | Reinvested or used for organizational growth |
| Taxation | Subject to income tax | Exempt from income tax (if registered as NGO) |
| Legal Structure | Company, partnership, sole proprietorship | Trust, society, association, NGO |
| Example | MM Company, Coca-Cola, Apple | Red Cross, NGOs, educational institutions |
| Accounting Focus | Profitability, ROI, shareholder wealth | Efficiency, transparency, social impact |
| Funding Sources | Loans, equity, retained earnings | Donations, grants, membership fees |
Note: The yield method calculation assumes the market rate equals the normal rate. If a different market rate is given, adjust accordingly. The net assets method is straightforward, while the yield method depends on expected returns.
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