VALUATION OF GOODWILL

AND SHARES
A Project Submitted to
University of Mumbai for Partial Completion of the Degree of
Bachelor in Commerce (Accounting & Finance)
Under the Faculty of Commerce
By
Kasabe Siddhesh Prakasha
Under the Guidance of
Mrs. Jyosthna Kadam
Changu Kana Thakur Arts , Commerce & Science College,
Sector-11,New Panvel .
2020-21
 INTRODUCTION
 It means the reputation of a business concern.
 It is intangible asset.
 It can be sold only with entire business and not separately.

 Value of goodwill generally fluctuates from time to time.

 “Goodwill is nothing more than the profitability that the old customers will
resort to the old place.”
—Lord Eldon
 FEARTURES OF GOODWILL

1. Goodwill is an intangible asset. It is non-visible but it is not a fictitious asset.

2. It cannot be separated from the business and therefore cannot be sold like other
3. The value of goodwill has no relation to the amount invested or cost incurred in
order
to build it.
4. Valuation of goodwill is subjective and is highly dependent on the judgment of
the
valuer.
5. Goodwill is subject to fluctuations.
TYPES OF GOODWIIL

 Purchased Goodwill

 Non-purchased Goodwill or Inherent Goodwill

METHODS OF VALUATION OF
GOODWILL
Super Profits Method

Average Profit Method

Capitalisation Method

Annuity Method

Weighted Average Method

 1.SUPER PROFIT METHOD
The Super Profit is the profit earned by a concern in excess of
profit earned by its competitor in the same market under same
business conditions.

Goodwill = Super Profits * No. Of Years

Super Profit = Future Maintainable Profit – Normal Profit

Normal Profit = Capital Employed * Normal Rate Of Return
 2.AVERAGE PROFIT
METHOD
Under this method, it is valued at agreed number of years’ of
purchase of the average profits of the past years.

Goodwill = Average Profit * No. Of Year Of Purchase

Average Profit = Total Profits

No. Of Years
 3. CAPITALISATION
METHOD
Capitalisation Of Average Profit Method :

Goodwill = Capitalised Value Of Average Profit – Capital Employed

Capitalisation Of Super Profits Method :

Under this method the average super profit is capitalized at a certain rate of
interest and this capitalized amount becomes the value of goodwill.

Goodwill = Super Profits / Normal Rate Of Return × 100

 4. ANNUITY METHOD
The value of goodwill is the present value of an annuity of the
annual super profit payable over an expected number of years at
the current rate of interest.

Goodwill = Super Profit × Annuity Value

Annuity Value = 1- ( 1+ r/100)ⁿ

r/100
5.WEIGHTED AVERAGE Method

Purchase consideration is an important number in finding out if any

goodwill arises during a business combination through the process
of purchase price allocation.

Goodwill = Purchase Consideration – Net Assets

 VALUATION OF SHARES

 Valuation of shares is the process of knowing the value of companys shares.

 Share valuation is done based on quantitative techniques and share value will vary
depending on the market demand and supply.
 The share price of the listed companies which are traded publicly can be known
easily.
 But w.r.t private companies whose shares are not publicly traded, valuation of
shares is really important and challenging.
 NEED OF VALUATION OF GOODWILL

1. For assessment of Wealth Tax, Estate Duty, Gift Tax, etc.

2. Amalgamations, absorptions, etc.
3. For converting one class of shares to another class.
4. Advancing loans on the security of shares.
5. Compensating the shareholders on acquisition of shares by the Government under
a scheme of nationalisation.
6. Acquisition of interest of dissenting shareholder under the reconstruction scheme,
etc.
 FACTORS INFLUENCING VALUATION

• Current stock market price of the shares.

• Profits earned and dividend paid over the years:
• Availability of reserves and future prospects of the company.
• Realisable value of the net assets of the company.
• Current and deferred liabilities for the company.
APPROACH OF SHARE VALUATION

 Assets Approach
 Income Approach
 Market Approach
METHOD OF SHARE VALUATION

 Asset Backing Method

 Yield-Basis Method
 Fair Value Method
 Return on Capital Employed Method
 Price-Earning Ratio Method.
THANK YOU