## Valuation of Business and Assets – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

Question 1.
“A business valuation involves logical application /analysis of historical/future tangible and intangible attributes of business”. Do you agree with this statement? What are the aspects involved in the preliminary study of valuation?

• Valuation is a process to assess the worth of an enterprise or a business.
• In case of corporate restructuring through mergers, amalgamations, takeovers, etc., valuation assumed great importance due to determination of the transaction price.
• Valuation plays a vital role in deriving the share exchange (swap) ratio.
• Determining the value of company/business/shares is a complicated, elaborate process.
• Valuation shall be exercised judiciously and diligently. However, it is a more a subjective than objective process, and depends on the skills and perceptions of the valuer/expert.
• It is an application of facts, figures, skills and insight of valuer. It is more an art than science.
Business valuation involves analytical and logical application/analysis of past as well as future tangible and intangible aspects of business.

Preliminary study to valuation includes –

1. Purpose of valuation,
2. Goodwill/Brand name in the market,
3. Business environment of the entity to be valued,
4. Estimation /forecast of future cash flows as accurately as possible,
5. Is company listed on any stock exchange?
6. If listed, whether shares of the company are traded frequently?
7. The industry to which the concerned entity belongs to,
8. The industry P/E ratio, past and future growth rate,
9. Who are the competitors locally and globally?
10. Whether any similar valuation has been done recently?
11. The technology concerning the enterprise and its probability of obsolescence,
12. The accepted discounting rates,
13. Market capitalization aspects,
14. Identification of hidden liabilities through analysis of material contracts,
15. Last years audited balance sheets.

Question 2.
Whatever may be the degree of complexity and method of satisfaction, valuation is always an estimate – explain citing principles to be kept in mind for valuation.
Valuation is a process to assess the worth of an enterprise or a business. In case of corporate restructuring through mergers, amalgamations, takeovers, etc., valuation assumed great importance due to determination of the transaction price.

It is said that, ‘irrespective of the complex deals and the expertise of the valuers, valuation is always an estimate or guesswork’. This statement is true that valuation is an estimate, but it is an intelligent and calculated estimate.

Hence, various methods are adopted for different types of transac¬tions. Sometimes, fair value of computed through a combination of valuation methods. Valuation is based on facts, past reports of the company and actual market data. The expertise and experience of the valuers make it an intellectual process as compared to a random guess.

Certain principles need to be borne in mind before finalizing Valuation Report. Valuation report may be required for specific assets or may be for whole business or undertaking.

Broadly following principles are to be kept in mind for valuation:
(a) Principle of Time Value of Money: This principle suggests that the value can be measured by calculating the present value of future cash flows discounted at the appropriate discount rate of return.

(b) Principle of Risk and Return: This principle believes that the investors are basically risk-averse and on the other hand expects higher amount of wealth. Higher the risk, higher may be possibility of return and vice versa.

(c) Principle of Substitution: This principle believes that understanding the market with competitive forces is very important in order to decide the price consideration. The risk-averse investor will not pay more than that of the substitute available in the market.

(d) Principle of Alternatives: This principle suggests that one should explore the various alternatives available in the market and should not rest only on one option. The benefits of vetting of various alternatives will give a comparative valuation and a prudent investor will choose the most beneficial alternative to his portfolio.

(e) Principle of Expectation: Cash flows are based on the expectations about the performance in future and not the past. In the case of mature companies, we may assume that the growth from today or after some certain period would be constant.

(f) Principle of Reasonableness: In valuation, the principle of reasonableness is most important. It takes into consideration various aspects viz. nature of business, historical background, brand image, book value of the stock, earning capacity, dividend track record, etc.

Question 3.
“Fair Value of shares is in fact not fair but a compromise effort for bringing the parties to an agreement, just like sudden death in Hockey or Football”. Justify with your views.
Valuation is a process to assess the worth of an enterprise or a business. In case of mergers, amalgamations, takeovers, etc., valuation assumed great importance due to determination of the transaction price. Valuation plays a vital role in deriving the share exchange (swap) ratio.

Valuation of a company is a complicated and elaborate process. It shall be exercised judiciously and diligently. It is a more a subjective than objective process and depends on the skills and perceptions of the valuer/expert. It is an application of facts, figures, skills and insight of valuer. It is more an art than science.

Valuation is a complex task that requires several inputs not only tangible but also intangible data. There cannot be any method or formula to calculate fair value though it is possible to calculate book value, market value averaging quoted prices for certain period.

However, efforts are made to ascertain fair value just like extension of playtime in Hockey or Football in case of tie even in extra time. Such method is used where the market value is independent of its profitability. By dividing the aggregate of values obtained through net assets method and yield method is the process to arrive at fair value.

Basically, the methods most suitable to arrive at a reasonably fair conclusion is attempted. Following well-known methods are applied to get fair value:
(a) Future maintainable profits basis method or the earning per share method;
(b) Net worth method or the break-up value method; and
(c) Market value method.

Question 4.
Makeover More-growth Financials Ltd. is in the process of making 1 Further Public Offer (FPO). Can you advise the Board on the precautions § to be taken in fixing the price and price-band for the proposed FPO?
In an FPO of equity shares, a company is free to determine the price of its shares. The issuing company may decide the issue price in consultation with the Lead Merchant Banker and through Book-Building activity.

Further, an issuer company may offer its securities at different prices, subject to certain legal norms. Retail investors may be offered shares at a lower rate than other investors’ categories. For a book-built issue, the price of the specified securities offered to an anchor investor shall not be lower than the price offered to other applicants.

The issuer may mention a price in the draft prospectus (in case of fixed price issue) and floor price or price band in the red herring prospectus (in case of a book-built issue).

The Board of Directors of Makeover More-growth Financials Ltd. shall take the following precautions in fixing price or price band –
(a) In case of book building process, floor price or price band need to be stated in a red-herring prospectus and to determine later the price, before filing with ROC.

(b) Announce the price or price band at least five working days before opening the bid in case of IPO but in case of FPO at least one working day in all newspapers in which pre-issue advertisements got released as well as websites of stock exchanges in which listed.

(c) The cap on price band shall be less than or equal to 120% of the floor price.

(d) The floor price or the final price shall not be less than the face value of specified securities involved in the Further Public Offer.

Question 5.
Paramhans Pharmaceuticals Ltd. is a listed company but the management decided to get the shares in the Company delisted from the stock exchange. The Directors desire to seek advice how to fix offer price. In the meantime, a Corporate Insolvency Resolution Process (CIRP) is initiated and a Resolution Plan has been resolved by the Committee of Creditors and awaiting approval of the Adjudicating Authority – Offer your advice.
The term delisting of securities means removal of securities of a listed company from a stock exchange. Through delisting, securities would no longer be traded at that stock exchange.

The offer price shall be determined through book building, after fixation of floor price. The final offer price shall be determined as the price at which the maximum number of equity shares is tendered by the public shareholders, based on SEBI (Delisting of Securities) Regulations, 2009.

In case of frequently traded shares, the minimum floor price shall be the higher of below prices:
the average of the weekly high and low of the closing prices of the equity shares of the company during the 26 weeks, or the average of the weekly high and low of the closing prices of the equity shares of the company during 2 weeks.

In case of infrequently traded shares, the minimum floor price shall be the higher of below prices:
highest price paid by the promoter for acquisitions of equity shares of the class sought to be delisted, during 26 weeks period prior to the date on which the recognized stock exchanges were notified of the board meeting in which the delisting proposal was considered; and,

other parameters including return on net worth, book value of the shares of the company, earning per share, price earning multiple vis-a-vis the industry average.

However, on commencement of CIRP, the SEBI Delisting Regulations do not apply. Where the Committee of Creditors have approved a resolution plan, the delisting price shall be as per Tribunal approved Resolution Plan. Such price shall not be less than the liquidation value as determined by the Registered Valuer.

Question 6.
Brands build benefits of future business – inspect the statement with a view to dwell upon the Importance of Brand valuation.
A brand is a distinguishing symbol, mark, logo, name, word, sentence or a combination of these items that companies use to distinguish their product from others in the market. Branding a product involves ascertaining product sustainability in the market.

Brand play an important role-

• Brands indicate the origin of goods;
• Brands connect the consumers’ mind to the manufacturer or service provider;
• Better value and service is associated with branded goods/services;
• Brands allow premium pricing of products and services;
• Brands make the job of consumers very easy in selection of goods

In order to protect the brands registration is done under several classes as per Trademarks Law.

Brands measure the ability of a company to leverage its strength to bring revenues in other territories and markets is of utmost importance.

Brands are productive (valuable) only when they are able bring cash flows to the company. With incremental cash flows, value of brand increases proportionately. Brands have to be constantly associated with good quality goods and services; they require proper show-casing and servicing and they should remain active in appropriate markets.

Question 7.
Fund Raising is an important exercise for any business activity. What are the important parameters to be kept in mind while doing valuation for fundraising?
Fundraising is an important exercise for any business activity. Raising money is a complicated multi-stage process. Business valuation is one of the most important steps prior to fundraising.

Business valuation needs understanding of variety of factors, professional judgment and experience. It includes identifying purpose of valuation, the value drivers affecting the company, understanding of economy, industry, critical awareness of the competitive forces and the suitable valuation method(s).

Business valuation is a process that follows a number of key steps. The five steps are-

1. Planning and preparation
2. Analysing the financial statements
3. Choosing the business valuation methods
4. Applying the selected valuation method
5. Reaching the business value conclusion

The important parameters to be considered while doing business valuation for fundraising –
(a) Compute quantum of funds required. It includes long-term as well as short-term requirements.

(b) Explore third-party valuers for an independent valuation process. Think like an investor and see the business independently.

(c) Additional funds shall meet the purpose and long-term survival and growth of the business.

(d) Consider expected profitability and cash-flow positions, EVA etc. to ensure future valuations are always favourable.

Question 8.
When no mistake is found in exchange ratio worked out by a recognized and reputed firm of Chartered Accountants and the same has been adopted by the shareholders/creditors with over whelming majority, Court/ Tribunal still can substitute the exchange ratio. Do you agree? Discuss.
Or
Question 9.
“Courts and Tribunals do not substitute or impose their opinion on the valuation report unless there are noticeable irregularities.” Offer your comments with certain judicial pronouncements.
Valuation is a process to assess the worth of an enterprise or a business. In case of mergers, amalgamations, takeovers, etc., valuation assumed great importance due to determination of the transaction price. Valuation plays a vital role in deriving the share exchange (swap) ratio.

Valuation of a company is a complicated and elaborate process. It shall be exercised judiciously and diligently. It is a more a subjective than objective process and depends on the skills and perceptions of the valuer/expert. It is an application of facts, figures, skills and insight of valuer.

In the landmark case of Miheer Mafatlal v. Mafatlal Industries, the honourable Supreme Court had laid down the rules regarding valuations by experts.

If share exchange ratio is fixed by Chartered Accountant upon consideration of various factors and approved by majority of shareholders in meeting, the Court will not disturb ratio.

Once the share exchange (swap) ratio has been worked out by a recognized firm of Chartered Accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the Court/Tribunal to change the exchange ratio.

The Court/Tribunal shall not interfere in the valuation, especially where the swap ratio has been accepted without any objection by an overwhelming majority of shareholders of two companies.

The Court/Tribunal shall not object to the collective commercial wisdom of shareholders, who have accepted the said exchange ratio.

Thus, where no mistake is found in exchange ratio worked out by a recognized and reputed firm of Chartered Accountants and the same has been adopted by the shareholders/creditors with overwhelming majority, Court/Tribunal shall not substitute the exchange ratio.

Question 10.
‘Valuation is an art, not a science. Explain this statement with reference to different methods to be applied while arriving at the fair value of shares.
Valuation is a process to assess the worth of an enterprise or a business. In case of mergers, amalgamations, takeovers, etc., valuation assumed great importance due to determination of the transaction price. Valuation plays a vital role in deriving the share exchange (swap) ratio.

Valuation of a company is a complicated and elaborate process. It shall be exercised judiciously and diligently. It is a more a subjective than objective process and depends on the skills and perceptions of the valuer/expert. It is an application of facts, figures, skills and insight of valuer.

Valuation is generally done on the basis of fair value when market value of a company is independent of its profitability. The fair value of shares is arrived at after consideration of different modes of valuation and diverse factors. There is no mathematically accurate formula of valuation. An element of guesswork or arbitrariness is involved in valuation.

The following four factors have to be kept in mind in the valuation of shares:

1. Capital base
2. Yield
3. Earning capacity; and
4. Marketability

For arriving at the fair value of shares, three well-known methods applied are:

1. the manageable profit basis (earnings per share method)
2. the net worth method or break-up value method
3. the market value method.

The fair value of a share is the average of the value obtained by the net assets method and the one obtained by the yield method. This is, in fact, not a valuation, but a compromise formula for bringing the prices to an agreement.

Thus, the valuation of shares is more of an art than science due to the mix of qualitative and quantitative factors involved in valuation process.

Question 11.
You being a Registered valuer conducted valuation of a company. What is all that you will cover in your valuation report?
As per MCA guidelines, valuation for certain corporate transactions shall be conducted by a registered valuer as defined under Section 247 of the Companies Act, 2013.

Considering the shareholders’ interest, transparency, corporate governance principles, minority interest etc. the MCA Expert Group recommends that following matters should compulsorily be covered in the Valuation Report.

The Valuation report shall be in a clear, and non-misleading manner, consistent with the need to maintain confidentiality.

The valuer shall cover the following in the Valuation Report –
1. Background Information – Cover brief particulars of company, proposed transaction, key historical financials, capital structure of the company, shareholding pattern, etc.

2. Purpose of Valuation and Appointing Authority – Context and purpose of valuation and the appointing authority.

3. Identity of Valuer – Identity of the Registered Valuer (with his registration number), as well as organization doing the valuation and any other experts, consulted in the valuation process.

4. Disclosure of valuer Interest/Conflict – A valuer shall disclose in his Report, possible sources of conflict and material interests, including association or proposed association.

5. Date of Appointment, Valuation Date and Date of Report – The Report should clearly state date of appointment of the Valuer, valuation date and the date of the report.

6. Sources of Information – The principal sources of information, both internal and external, which have been relied upon for the purpose of valuation.

7. Procedures adopted in carrying out the Valuation – The procedures adopted in valuation such as review of past financials, review and analysis of financial projections, industry analysis, SWOT analysis, assumptions made, with basis for the same, comparison with similar transactions, comparison with other similar listed companies, discussions with management, review of principal agreements/documents etc.

8. Major Factors influencing the Valuation – Key factors which have a material impact on the valuation, including size of corporate assets or shares, their materiality or significance, minority or majority holding and changes on account of the transaction, any impacts on controlling interest, diminution or augmentation therein and marketability or lack thereof.

9. Valuation Methodology – Generally, multiple valuation methods are used to arrive at the fair value of the business/share/asset/ company etc. Following are some of the methods which are often used for valuations:

• Asset Approach
• Income Approach
• Discounted Future Earnings/Cash Flows.
• Market Approach
• Comparable Transactions/Valuations

10. Conclusion – Clear statement of the value ascribed to the business/ assets in question.

11. Caveats, Limitations and Disclaimers – Any caveats, limiting conditions or disclaimers to the report are clearly stated with appropriate specificity, the valuer shall not disclaim liabilities for his expertise or deny his duty of care.

Question 12.
“Valuation is influenced not only by the motive of the acquirer company but also that of target company’s objectives.” Analyze the statement in brief.
Valuation is a process to assess the worth of an enterprise or a business. In case of mergers, amalgamations, takeovers, etc., valuation assumed great importance due to determination of the transaction price. Valuation plays a vital role in deriving the share exchange (swap) ratio.

Merger/Amalgamation/Takeover is always supported by valuation. The appropriate method of business valuation depends on the acquisition motives.

The reasons for valuation could be to achieve the objectives of the top management, either purely financial aspects relating to taxation, financial restructuring or business-related such as expansion or diversification.

A method adopted to arrive at valuation is to evaluate present value of the future cash flows. Acquisitions are not only normally market-driven but also influenced by non-financial considerations, such as goodwill, brand acquisition, synergy benefits etc.

Thus, the value of a target gets affected not only by the motive of the acquirer but also by the target company’s objectives. The price could be affected by the motives of the other bidders as well.

Question 13.
Explain Market Comparables Method of valuation. What are the steps involved in this method of valuation?
Valuation is a process to assess the worth of an enterprise or a business. Valuation of a company may be done on the basis of –

• Net asset value;
• Earnings value;
• Market price basis

Generally, the method selected by the registered expert valuers will depend on the nature of the company and the motives of valuation.

Market Comparables technique is applied in case of unlisted entities. This method estimates value by establishing relationship between basic elements of similar companies for past years. It is based on market multiples of ‘comparable companies’.

Also known as Relative Method of Valuation. Examples of market comparable technique –

• Earnings/Revenue Multiples (Valuation of Pharmaceutical Brands)
• Book Value Multiples (Valuation of Financial Institution or Banks)
• Industry-Specific Multiples (Valuation of cement companies based on Production capacities)
• Multiples from recent M&A transactions.

Following steps are involved in this method of valuation:
(a) Comparable assets are identified and their market values are obtained
(b) Market values converted into standardized values, since absolute price cannot be compared
(c) Standardised value or multiple for the asset being analysed are compared with the standardised value of the comparable asset

Though this method is easy to understand and quick to compute, it may not capture the intrinsic value and may give a distorted picture in case of short-term volatility in the markets. There may often be difficulty in identifying the comparable companies.

Question 14.
“The key to valuation is finding a common ground between all the companies for the purpose of fair evaluation.” Comment with reference to factors influencing valuation.
Valuation is a process to assess the worth of an enterprise or a business. The method of valuation depends on the nature of the company and the purpose of valuation. Hence, various methods are adopted for different types of transactions.

Sometimes, fair value of computed through a combination of valuation methods. Valuation is based on facts, past reports of the company and actual market data. The expertise and experience of the valuers make it an intellectual process as compared to a random guess.

Determining the value of a business is a complicated and intrinsic process. Valuing a business requires determination of its future earnings potential, the risks inherent in those future earnings.

Strictly speaking, a company’s fair market value is the price at which the business would change hands between a willing buyer and willing seller when neither is under any compulsion to buy or sell and both parties have knowledge of relevant facts.

The other salient factors influencing valuation are:

• Dividends paid on the shares;
• Relative growth prospects of the two companies;
• Net worth of the company, including Debt-Equity Ratio;
• Net assets of the two companies;
• Earning capacity, EPS of both companies,
• Current market prices of the two companies,
• Growth prospects and enhanced earning per share,
• Order book, future capacity utilization,
• Level of competition in the industry,
• Record of efficiency, integrity and honesty of the BOD and managerial personnel.
• Quality of top and middle management of the company and their professional competence.

Question 15.
Simran Simple Synthetics Ltd. is contemplating to issue Sweat equity shares for their staff in R&D department. Shares are listed on both the exchanges, BSE and NSE. As a Company Secretary, you are tasked with enlightening the Board on the manner of fixing price per Sweat equity share in line with the SEBI regulations.
To
The Board of Directors Simran Simple Synthetics Ltd.
Sub: Manner of fixing the price of sweat equity shares issued by Simran Simple Synthetics Ltd.

The shares of the company are listed on BSE and NSE respectively. As the company wants to issue sweat equity shares it has to comply with the Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002. SEBI has specified various norms including the provisions relating to fixation of price in case of issuance of sweat equity shares by a listed company.

In calculating the price for sweat equity shares one need to follow the Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002. As per these Regulations, price is determined as per higher of the following as on the relevant date –
a. Average of weekly high and low closing prices during last six months

b. Average of weekly high and low closing prices during last 2 preceding weeks
“Relevant date” for this purpose means the date which is thirty days prior to the date on which the meeting of the shareholders is convened, in terms of the provisions of the Companies Act, 2013.

1. If the shares are listed on more than one stock exchange, but quoted only on one stock exchange on the given date, then the price on that stock exchange shall be considered.

2. If the share price is quoted on more than one stock exchange, then the stock exchange where there is highest trading volume during that date shall be considered.

3. If shares are not quoted on the given date, then the share price on the next trading day shall be considered. Hence, in the instant case trading volumes are to be compared in addition to quoted price in both BSE and NSE stock exchanges. The Regulations also require valuation of intellectual property that creates value addition.

Question 16.
Despite having a statutory warning by Mutual Fund Companies as “Past performance may or may not sustain in future”, past share market price data is quite often used in equity valuation while investing /acquiring equity and SEBI regulations also take into account weekly highs mid lows of such market prices as litmus test. However, there may be certain inherent flaws and/or limitations while going by such market-based valuation. Highlight to your Board of Director’s certain possible flaws and limitations in such market price-based valuation which may be misleading.
Valuation is a process to assess the worth of an enterprise or a business. Determining the value of a business is a complicated and intrinsic process. Valuing a business requires determination of its future earnings potential, the risks inherent in those future earnings.

Hence, various methods are adopted for different types of transactions. Basically, following valuation method are used –
(a) Net Asset Value (Balance Sheet basis)
(b) Earnings Method (Profit & Loss basis)
(c) Market Price Method (Listed companies)

Normally, while ascertaining value of a listed company, market price of its shares is considered for the purpose of valuation.

Even in various SEBI Regulations, weekly high or low prices of 26 weeks or 2 weeks or some other period is taken into account in fixing prices for preferential allotment, ESOPs, etc.

However, the market price method suffers from few drawbacks such as –

• Not applicable for unlisted company;
• Not suitable for shares which are thinly traded;
• Not suitable for valuation of business division;
• Not suitable where there is intention to liquidate and distribute assets,
• Market price is affected by global economic issues, political events, calamities etc.

Question 17.
Explain the following methods of valuation –
(1) Net Realizable Value Method and
(2) Valuation of Slump Sale
(i) Net Realisable Value Method:
This valuation method is generally used in case of liquidation, where assets have to be valued as if they were individually sold and not on a going concern basis.
Liabilities are deducted from the liquidation value of the assets to determine the liquidation value of the business.

The valuer shall also consider the liabilities which will arise on closure such as retrenchment compensation, termination of critical contracts, etc. Tax consequences of liquidation should also be considered.
Any distribution to the shareholders of the company on its liquidation, to the extent of accumulated profits of the company, is regarded as deemed dividend. Dividend Distribution tax will have to be captured for such valuation.

(ii) Valuation of Slump Sale:
Slump sale means transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities.

If an undertaking is transferred by way of exchange, compulsory acquisition, extinguishment, inheritance by will, etc., the transaction may not be covered by this Section.

The consideration for transfer is a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities.

As per Section 50B of the Income-tax Act, 1961, capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improvement for the purpose of calculation of capital gains tax.

Following the computation of capital gains u/s 50B of the Income Tax Act, 1961 –
Capital Gains = Sale Consideration (-) Net-worth of the Undertaking
Net Worth = Value of Total Assets (-) Value of Total Liabilities
Value of Total As- = WDV of Fixed Assets (+) Book value of other assets sets.

Question 18.
In calculating fair value, element of guesswork or arbitrariness is imminent. Comment.
Valuation is a process to assess the worth of an enterprise or a business. In case mergers and takeovers, etc., valuation assumed great importance due to determination of the transaction price.

It is said that, ‘irrespective of the complex deals and the expertise of the valuers, valuation is always an estimate or guesswork’. This statement is true that valuation is an estimate, but it is an intelligent and calculated estimate.

Hence, various methods are adopted for different types of transac¬tions. Sometimes, fair value of computed through a combination of valuation methods. Valuation is based on facts, past reports of the company and actual market data. The expertise and experience of the valuers make it an intellectual process as compared to a random guess. However, an element of guesswork or arbitrariness is involved in valuation.

While computing the fair value, following factors to be considered –

• yield and earning capacity,
• marketability of shares,
• quantum of shares to be acquired,
• dividend pay-outs, bonus and rights issue etc.

Question 19.
What are the preliminary steps that are to be followed for a proper valuation?
Corporate valuation involves analytical and logical application/analysis of historical/future tangible and intangible attributes of business.

The preliminary study to valuation involves the following aspects:

• Purpose of valuation.
• Goodwill/Brand name in the market.
• Business environment of the entity to be valued.
• Estimation/forecast of future cash flows as accurately as possible.
• Is company listed on any stock exchange?
• If listed, whether shares of the company are traded frequently?
• The industry to which the company belongs
• The industry P/E ratio, past and future growth rate.
• Who are the competitors locally, internationally?
• Whether any similar valuation has been done recently
• The technology concerning the enterprise and its probability of obsolescence
• Study of market capitalization aspects
• Identification of hidden liabilities through analysis of material contracts.

Question 20.
What are the common strategies that warrant valuation of shares, business or even an undertaking?
Valuation is a process to assess the worth of an enterprise or a business. Determining the value of company/business/shares is a complicated, elaborate process. Hence, valuation shall be exercised judiciously and diligently. It is more of a subjective process than objective process and depends on the skills and perceptions of the valuer/expert.

Following are the business strategies that warrant valuation of shares, business and company –

• Issue of shares through an IPO/FPO process.
• Issue of shares through preferential allotment to investment bankers, venture capitalists, private equity funds etc.
• Investment in a Joint Venture.
• Deriving value for making ‘open offer for acquisition of shares, in case of a takeover bid.
• Buy-back of shares from the market.
• Delisting process, shares are valued for compensating the shareholders.
• Mergers, amalgamations and takeovers,
• Compensating dissenting shareholders, during a scheme of re-construction.
• Conversion of debt, preference capital into equity capital.
• For the purpose of advancing a loan against security (pledge) of shares of the company.
• Compensating shareholders by the Government, under a scheme of nationalization

Question 21.
What is the Valuation documentation and what is the objective of this?
Valuation is a process to assess the worth of an enterprise or a business. Determining the value of company or business or shares is a complex and elaborate process. Hence, valuation shall be exercised judiciously and diligently. It is more of a subjective process than objective process, and depends on the skills and perceptions of the valuer/expert.

Valuation exercise is based on observation, inspection, analysis and calculation. During this process, the valuer goes through various documents, records his observation, makes relevant calculation and records these calculations and analyse results.

In this process a lot of documents are generated which forms the basis of his conclusion on the valuation of the subject matter. It is very necessary for him to preserve all such records so that these documents may help him to substantiate his conclusion on valuation. Further, these documents also become a matter of reference in future. Documentation is an essential element of valuation quality.

Valuation documentation provides the principal written record to support the following:
1. Ensure that the valuation exercise was performed with due diligence and in accordance of generally accepted valuation principles; and

2. To support the valuers’ conclusions about valuation exercise and other related aspects of valuation.

3. The following are some more specific objectives of documentation in Valuation exercise:
– Assisting Valuer to plan and perform the Valuation Exercise;
– Assisting those responsible to direct, supervise, and review the work performed;
– Providing and demonstrating accountability of those per¬forming the work (compliance with applicable standards);
– Assisting quality-control reviewers to understand and assess how the engagement team reached and supported significant conclusions;
– Enabling internal and external inspection teams and peer reviewers to assess compliance with professional, legal, and regulatory standards and requirements; and
– Assisting successor Valuer.

Question 22.
Write a note on International Valuation Standards Council.
Valuation is a process to assess the worth of an enterprise or a business. Determining the value of company or business or shares is a complex and elaborate process. Valuation is more of a subjective process than objective process and depends on skills and perceptions of the valuer.

Valuation Standards aims to provide uniformity in valuation of tangible and intangible assets. The International Valuation Standards Council (IVSC) is an established international body for setting valuation stan¬dards.

The IVSC develops and maintains standards on how to undertake and report valuations, especially those that will be relied upon by investors and other 3rd party stakeholders.

IVSC supports the need to develop a framework of guidance on best practice for valuations of the various assets and liabilities and for the consistent adherence to such standards.

Membership of IVSC is open to organisations of users, providers, professional institutes, educators, and regulators of valuation services.

Basically, valuations may be performed for a wide variety of purposes including the following:

Valuation for Dispute Resolution such as bankruptcy, contractual disputes, oppression cases,
Tax matters such as corporate reorganizations; income tax, property tax etc.

Question 23.
“Valuation is an important aspect in merger and acquisition and it should be done by a team of experts/’ Comment on the statement, mentioning which type of experts should be in the team.
Valuation is a process to assess the worth of an enterprise or a business. Determining the value of company or business or shares is a complex and elaborate process.

Hence, valuation shall be exercised judiciously and diligently. It is more of a subjective process than objective process and depends on the skills and perceptions of the valuer/expert.

Valuation in merger and acquisition should be done by a team of experts, considering the basic objectives of acquisition. The team should comprise of financial experts, accounting specialists, technical and legal experts who should look into aspects of valuation from different angles.

Accounting expert has to forecast the impact of the events of merger on P&L Account and Balance Sheet through projection for next five years and economic forecast. Using accounting data, he must calculate performance ratios, financial capacity analysis, budget accounting and management accounting and read the impact on stock values, etc. besides, installing accounting and depreciation policy, treatment of tangible and intangible assets, doubtful debts, loans, interests, maturities, etc.

Technical experts give their opinion on life and obsolescence of depreciated assets, replacements and adjustments in technical process, etc. and form independent opinions on workability of plant and machinery and other assets.

Legal experts opine on compliance of legal formalities in implementing acquisition, tax aspects, review of corporate laws as applicable, legal procedure in acquisition strategy, laws affecting transfer of stocks and assets, regulatory laws, labour laws, preparing drafts of documents to be executed or entered into between different parties, etc.

Question 24.
The method of valuation of a business, however, depends to a great extent on the acquisition motive. What are those motives of valuation?
Valuation is a process to assess the worth of an enterprise or a business. In case of mergers, amalgamations, takeovers, etc., valuation assumed great importance due to determination of the transaction price. Valuation plays a vital role in deriving the share exchange (swap) ratio.

Merger/Amalgamation/Takeover is always supported by valuation. The appropriate method of business valuation depends on the acquisition motives.

The acquisition motive is an important aspect in valuation for merger/ amalgamation/takeover. Generally, the acquisitions are usually guided by strategic behavioural motives.

The reasons for acquisition could be:

• Financial motives – for example taxation, assets-stripping, financial restructuring involving an attempt to increase the resources base and portfolio-investment;
• Business related, such as expansion or diversification;
• Behavioural reasons of personal ambitions or objectives of the Top Mgt. such as ambition, vision and growth etc.

Question 25.
“Brands do not command any value unless they are able to bring cash flows to the company that has adopted the same. In order to sustain the value of the brand, there must a constant effort by the company on various aspects.” Comment.
A brand is a distinguishing symbol, mark, logo, name, word, sentence or a combination of these items that companies use to distinguish their product from others in the market. Branding a product involves ascertaining product sustainability in the market.

The value of a brand is its power to bring cash inflows for a business. Brands have to be constantly associated with good quality goods and services; they require proper showcasing and servicing and they should remain active in appropriate markets.

Brand play an important role –

• Brands indicate the origin of goods
• Brands connect the consumers’ mind to the manufacturer or service provider
• Better value and service is associated with branded goods/services
• Brands allow premium pricing of products and services
• Brands make the job of consumers very easy in selection of goods

In order to sustain the valuation of the brand, there must a constant attempt from the company on the following aspects:
(a) To secure registration of the Brand in all relevant classes.

(b) To secure registration of the Brand in all countries where there are opportunities to sell Branded Products of the Company.

(c) To set up a “surveillance team” within the Marketing Department of the Company so as to ensure that there is no dilution to the value of the Brand.

(d) To ensure that attempts to use fake brands that are similar or deceptively similar are challenged with full force so as to spread the message that the Company is conscious of the value of its brand and it will be aggressive in taking steps not only to put an end to such illegal, dishonest and unauthorized use but also to punish such users and claim damages.

(e) To ensure that there is always a budget allocation for promoting the brand.

(f) To adopt a proper policy with regard to slogans and catchy phrases so that the Company does not knowingly cause any infringement of the industrial and intellectual property rights of any other person in any country or territory.

(g) To ensure that the extent of growth in the value of the brand very year is always higher than the depreciation or dent that existing or new competition may cause.

Question 26.
Explain briefly the features which must be taken into consideration for arriving at valuation of equity shares of a company in a particular transaction.
Valuation is a process to assess the worth of an enterprise or a business or an equity share. The method of valuation depends on the nature of the company and the purpose of valuation.

Value of equity shares depends on the following factors –
(a) Block of shares: Valuation of equity shares may vary depending on the number of shares to be bought. Purchase of bulk shares carries a premium. A substantial holder can always influence the operations of a company. Hence, a controlling interest carries a separate value.

(b) Restricted transferability: Another important factor is easy liquidity. Shareholders of unquoted public companies or private companies do not enjoy easy marketability. Hence, such shares, are mostly discounted for lack of liquidity. Thus, good company shares may be valued less due to lack of liquidity, restricted transferability.

(c) Dividends and valuation: Companies paying steady dividends enjoy greater popularity and the prices of their shares are high while shares of companies with unstable dividends do not enjoy confidence of investors and consequently, they suffer in valuation.

(d) Bonus and Rights issue: Value per share increases when bonus or rights issues are announced since they perceive immediate gains to the shareholder.

(e) Statutory valuation under provisions of various enactments like the Income-tax Act, 1961, Companies Act, 2013, SEBI Regulations etc.

Question 27.
Write a detailed note on Discounted Cash Flows (DCF) valuation method.
Valuation is a process to assess the worth of an enterprise or a business.
Valuation is an elaborate and complex process, which requires several inputs, not only tangible but also intangible data. Hence, various methods are adopted for different types of transactions such as Net Asset Method, Earnings method, Market Price method and DCF Method.

The Discounted Cash Flow (DCF) method is based on the assumption that value of a business is directly related to its cash-generating ability.

As per DCF method, a business is valued by discounting its free cash flows for a pre-determined forecast period, at a discount factor. Free cash flows mean the cash available for distribution after setting aside reinvestment/capital expenditure and additional working capital requirements to sustain the operations and growth of the business.

This method also uses the concept of terminal value, which implies the free cash flows from the end of fore casted period till infinity. Terminal value is based on the value of a business as a going concern.

DCF method is a better method of valuation than other methods as it captures all elements of a business, expressed in terms of cash flows.

The discounted cash flow (DCF) model is applied in the following steps:

• Estimate the future cash flows of the target based on the assumption for its post-acquisition management by the bidder over the forecast horizon.
• Estimate the terminal value of the target at forecast horizon.
• Estimate the cost of capital appropriate for the target.
• Discount the estimated cash flows to give a value of the target.
• Add other cash inflows from sources such as asset disposals or business divestments.
• Subtract debt and other expenses, such as tax on gains from disposals and divestments, and acquisition costs, to give a value for the equity of the target.
• Compare the estimated value with its pre-acquisition value to determine value addition.

The drawback of DCF method is that it may suffer from creditability and objectivity because projections can only be made based on estimates and assumptions. Hence, the genuineness of this method will substantially depend on the quality of information available.

Question 28.
“Brands belong to a different species. While physical resources could be created easily if augmenting financial resources is not a problem, same is not the case of brands. It is advisable to approach the brand valuation on the basis of premium price method.” Comment on the statement high¬lighting valuation approach for brands.
Normally, the value of a business could be estimated on a going-concern basis by computing the earnings capacity. Net Asset Value method may not be ideal for the enterprises having highly depreciating assets. Intangible assets are knowledge-based assets.

They are intellectual properties and hence are different from tangible assets. Intangible assets do not have physical substance. Examples of intangible assets are: Brands, Patents, Trademarks, Designs, Copyrights, Technical know-how, Software, Formulations, Franchises, and Goodwill etc.

Valuation of intangible assets is done in a fashion similar to business valuation. The methods can be classified into three approaches:

1. Income Approach – Discount Cash Flow Models
2. Cost Approach – What it cost to generate the brand value
3. Market Approach – Comparable transactions value.

For brand valuation, cost approach may not help, since there is no direct correlation between cost incurred to fortify a brand.

It is advisable to approach the brand valuation on the basis of ‘Premium Price Method’. The commitment of the company to maintain stringent quality gives us confidence in adopting a Premium Price method for valuing the Brand.

Question 29.
Write a short note on the valuation of stock options under SEBI (Share Based Employee Benefits) Regulations, 2014.
Valuation is a process to assess the worth of an enterprise or a business. It is an elaborate and complex process, which requires several inputs, not only tangible but also intangible data.

The valuation method selected may differ according to the purpose/ rationale of valuation. There are legal aspects of valuation, where the statute provides guidelines for valuation.

SEBI (Share Based Employee Benefits) Regulations, 2014 provides for regulation of all schemes by companies for the benefit of their employees.

ESOP or Employee Stock Option Scheme means a scheme under which a company grants employee stock option directly or through a trust. A company may provide a scheme under which an employee has an option to buy the shares of the company at a predetermined date at a predetermined price.

The value of the share price for ESOP can be determined in two ways –
(a) Intrinsic value method – Intrinsic value of ESOP is the difference between the market price and the price at which option can be exercised. E.g. the market price of a company’s share is Rs.250 and the option at which the share can be exercised is Rs. 150, then, Intrinsic value of the share = Market price (-) ESOP exercise price = 250- 150 = Rs. 100

(b) Fair value method – Fair Value of a stock option is the price that shall be calculated for that option in an arm’s length transaction between a willing buyer and a willing seller. Fair value shall be estimated using an option-pricing model (for example Black- Scholes model or a binomial model) that takes into account as of the grant date, the exercise price and expected life of the option, current market price and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option.

Question 30.
“Market-based approach to valuation Is adopted for determination of price In the case of preferential allotment, buy-back and open offer. But the market price is not so reliable for the purpose of valuation.” In the light of the statement, state the limitations of market-based approach particularly in case of preferential allotment, buy-back and open offer.
Valuation is a process to assess the worth of an enterprise or a business. Determining the value of a business is a complicated and intrinsic process. Hence, various methods are adopted for different types of transactions. Basically, following valuation method are used –

• Net Asset Value (Balance Sheet basis)
• Earnings Method (Profit & Loss basis)
• Market Price Method (Listed companies)

Normally, while ascertaining value of a listed company, market price of its shares is considered for the purpose of valuation.

SEBI has often considered market value as one of the very important base – such as Preferential allotment, Buyback, Open offer price calculation under the Takeover Code. Even in other SEBI Regulations, weekly high or low prices of 26 weeks or 2 weeks or some other period is taken into account in fixing prices for preferential allotment, ESOPs, etc.

However, the market price method suffers from few drawbacks such as –

• Not applicable for unlisted company
• Not suitable for shares which are thinly traded
• Not suitable for valuation of business division
• Not suitable where there is intention to liquidate and distribute assets
• Market price is affected by global economic issues, political events, calamities etc.

Question 31.
Apart from comprehensive analysis covering the past, present and future earnings and prospects of the company, several other factors are to be taken into account for valuation of an enterprise. List out the important factors that deserve consideration for proper valuation of an enterprise. ;
Valuation is a process to assess the worth of an enterprise or a business or an equity share. The method of valuation depends on the nature of the company and the purpose of valuation.

Value of equity shares depends on the following factors :

• Net worth of the company, including Debt-Equity Ratio,
• Earning capacity, EPS of both companies,
• Current market prices of the two companies,
• Net assets value, liquidity of the company,
• Growth prospects and enhanced earning per share,
• Dividend track record and history of bonus shares,
• Order book, future capacity utilization,
• Level of competition in the industry,
• Realizable value of the net tangible assets as well as liquidity of the company.
• Record of efficiency, integrity and honesty of the BOD and managerial personnel.
• Quality of top and middle management of the company and their professional competence.

Question 32.
Short Note – Valuation of Employee Stock Options under the SEBI (Share Based Employee Benefits) Regulations, 2014.
SEBI (Share Based Employee Benefits) Regulations, 2014 provides for regulation of all schemes by companies for the benefit of their employees.

ESOP/ESOS or Employee Stock Option Scheme means a scheme under which a company grants employee stock option directly or through a trust.

A company may provide a scheme under which an employee has an option to buy the shares of the company at a pre-determined date at a pre-determined price.

The value of the share price for ESOP can be determined in two ways –
(a) Intrinsic value method – Intrinsic value of ESOP is the difference between the market price and the price at which option can be exercised. E.g. the market price of a company’s share is Rs.250 and the option at which the share can be exercised is Rs. 150, then, Intrinsic value of the share = Market price (-) ESOP exercise price = 250 – 150 = Rs. 100

(b) Fair value method – Fair Value of a stock option is the price that shall be calculated for that option in an arm’s length transaction between a willing buyer and a willing seller. Fair value shall be estimated using an option-pricing model (for example Black- Scholes model or a binomial model) that takes into account as of the grant date, the exercise price and expected life of the option, current market price and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option.

Question 33.
Short Note – Registered Valuer
Valuation is a process to assess the worth of an enterprise or a business or an equity share. The method of valuation depends on the nature of the company and the purpose of valuation.

Valuation shall be exercised judiciously and diligently. However, it is a more a subjective than objective process, and depends on the skills and perceptions of the valuer/expert.

A person shall be eligible to be a registered valuer if he –

• is a valuer member of a Registered Valuers Organisation (RVO)
• is recommended by registered valuers organisation of which he is a valuer member
• has passed valuation examination within 3 years preceding the date of making an application
• is a resident of India, and possesses the required educational qualifications and experience
• is not a minor, or not been declared to be of unsound mind or not adjudged bankrupt.

A partnership or company may become registered valuers where it is set up for rendering professional or financial services, incl. valuation services. At least 3 partners/directors shall be registered valuers.

While performing valuation, every registered valuer shall –

• adopt internationally accepted valuation standards or valuation standards adopted by any Registered Valuers Organisation.
• follow high standards of integrity, fairness and professional behaviour.
• maintain arms-length relation with his clients and ensure independent judgment.
• exercise utmost due diligence and provide professional services with technical standards.
• shall constantly update himself with knowledge to provide best services to his clients.

Registered Valuers Organization (RVO) is registered as Section 8 Company or a professional institute established by a Statute or a registered society under the Societies Registration Act, 1860 or set up as a trust under the Indian Trust Act, 1882.

An individual may apply for registration if he/she has –

• post-graduate degree from an approved University and at least 3 years experience, or
• graduate degree from an approved University and at least 5 years experience, or
• membership of recognized professional institute and at least 3 years experience.

Question 34.
Sun Ltd. (listed company) had paid dividend of ₹ 10 per share in the current year. The estimated animal growth rate of dividend is 5% per annum and the share price is ₹ 120. Moon Private Ltd. (unlisted, company), has paid dividend of ₹ 2 per share. The annual growth rate of the company is estimated to be 10% per annum. Calculate the rate of return of the listed company, Sun Ltd. and apply the same to unlisted company to compute the value of the share of the unlisted company Moon Private Ltd. (Assuming annual growth rate will continue for the future also)
Given for Sun Limited (listed company) –
DPSo of Sun Ltd. = ₹ 10, growth rate (g) = 5%, Market price per share (MPo) = ₹ 120 ‘
Given for Moon Limited (unlisted company) –
DPSo of Sun Ltd. = ₹ 2, growth rate (g) = 10%,
As per Gordon’s dividend growth model, Cost of Equity for Sun Ltd. –
Ke = $\frac{\text { DPSo }(1+g)}{\mathrm{MPo}}+\mathrm{g}$
Ke= $\frac{10 \times(1+5 \%)}{120}+5$
Ke = 13.75 % (i.e. expected rate of return of Sun. Ltd)

Using the expected rate of return applicable for Sun Ltd. to Moon Ltd. –
Mpo= $\frac{\text { DPSo }(1+\mathrm{g})}{\mathrm{Ke}-\mathrm{g}}$
MPo = $\frac{2 \times(1+10 \%)}{13.75 \%-10 \%}$
MPo = $\frac{2.10}{3.75 \%}$
ConclusIon – the value per share for Moon Ltd. is 58.67.

Question 2.
Draft Balance sheet of Mentos Ltd. as on 31 st March 2019 (₹ in ‘000) –

 Liabilities ₹ Assets ₹ Equity share capital (FV ₹ 10) 10,000 Land and Building 7,500 16% Preference Share (FV ₹ 100) 3,000 Plant and Machinery 3,700 General Reserve 1,050 Furniture 730 18% Debentures 600 Investments 1,620 Other Current Liabilities. 350 Inventory 550 Trade Receivables 750 Cash and Bank 150 Total 15,000 Total 15,000

(a) Zeus Ltd. will take over Mentos Ltd. on 10th May 2019.
(b) Debenture-holder of Mentos Ltd. are discharged by issuing 12% debenture of Zeus Ltd. at a premium of 15%.
(c) Intrinsic value per share of Mentos Ltd. is  ₹ 40 and that of Zeus Ltd. ₹ 50.
(d) Zeus Ltd. will issue shares on basis of intrinsic value to satisfy the equity shareholder of Mentos Ltd. However, the entry should be made at par value only. The nominal value of each equity share of Zeus Ltd. is f 10.
(e) 16% preference shareholders of Mentos Ltd are discharged at a premium of 20% by issuing necessary number of 10% preference share of Zeus Ltd. (FV ₹ 100 each). Compute the purchase consideration.
Given –
Intrinsic Value per equity share of Mentos Ltd. (Target Company) = ₹ 40
Intrinsic Value per equity share of Zeus Ltd. (Acquiring Company) = ₹ 50

Swap ratio = $\frac{\text { Intrinsic Value per share of Mentos Ltd. }}{\text { Intrinsic Value per share of Zeus Ltd. }}=\frac{\text { ₹ } 40}{\text { ₹ } 50}$ = 0.80 per share

Existing Equity Share Capital o Mentos Ltd. (₹ 000) = ₹ 10,000
Hence, consideration for Equity Share Capital of Mentos Ltd. = ₹ 10,000 × 0.80
Hence, consideration for Equity Share Capital of Mentos Ltd = ₹ 8,000
Existing Preference Share Capital of Mentos Ltd. (₹ ‘000) = ₹ 3,000
Zeus Ltd. agreed to discharge them at 20% premium = ₹ 3,600

Total Purchase Consideration = Consideration for Equity Capital (+) Preference Capital
Total Purchase Consideration = t 8,000 (+) ? 3,600 Total Purchase Consideration = ₹ 11,600
Note – Debenture-holders not considered in computation of purchase consideration as per AS-14.

Question 3.
Blue Springs Ltd. incorporated a new company namely Defence Springs Ltd. and transferred its defence component division to it on slump sale basis for a lump sum consideration of ₹ 255 lakh. The assets and liabilities of the defence component division are as under:

 Assets ₹ (in lakh) Gross value of fixed assets 410 Accumulated depreciation till date 240 Current assets (other than liquid assets) 80 Liquid assets 30 Liabilities: Trade liabilities 60 Secured loans (including short-term loans) 80 Short-term loans 35

Calculate the following –
(i) Aggregate value of total assets
(ii) Book value of net assets
(iii) Net-worth of the defence component division; and
(iv) Capital gains as per section 50B of the Income-tax Act, 1961.
(i) Aggregate value of total assets:

 Particulars ₹ (‘lakhs) Gross Value of Fixed Assets 410 (-) Accumulated Depreciation 240 Hence, Depreciated value of Fixed Assets 170 (+) Current Assets (except liquid) 80 (+) Liquid assets 30 Aggregate Value of Total Assets 280

(ii) Book Value of Net Assets

 Particulars ₹ (‘lakhs) Net (Depreciated) value of Fixed Assets 170 (+) Total Current Assets 110 Book Value of Net Assets 280

(iii) Net Worth of the Defence Component Division:

 Particulars ₹ (‘lakhs) Aggregate Value of Total Assets 280 (-) Trade Liabilities 60 (-) Secured Loans (Long term + short term) 80 Net Worth of Defence Component DIvision 140

(iv) Capital Gains as per Section 50B of the Income Tax Act

 Particulars ₹ (‘lakhs) Net Sale Consideration 255 (-) Net Worth of Defence Comp. Division 140 Capital Gains u/s 50B 155

Question 4.
White Chicks Ltd. is listed on Bombay Stock Exchange. The management wishes to issue sweat equity shares to the new Chairman and Managing Director for which extraordinary general meeting is scheduled on 15th July 2016. Based on the following information, calculate the minimum value at which sweat equity shares can be issued, and submit your opinion to the management making your own assumptions, wherever required. Substantiate your answer with relevant provisions of SEBI Regulations.

 Particulars (₹) Average of weekly high and low of the closing prices during last six months as on ‘relevant date’ 275.00 Average of weekly high and low of the closing prices during last six weeks as on ‘relevant date’ 285.00 Average of weekly high and low of the closing prices during last six years as on ‘relevant date’ 185.00 Average of weekly high and low of the closing prices during last two months as on ‘relevant date’ 282.00 Average of weekly high and low of the closing prices during last two weeks as on ‘relevant date’ 314.00 Average of weekly high and low of the closing prices during last two years as on ‘relevant date’ 214.00

As per Section 54 of the Companies Act, 2013, Sweat Equity Shares’ means equity shares issued by a company to its employees or directors at a discount or a consideration other than cash, for providing know-how or making available rights such as intellectual property rights, or value addition. As per SEBI (Issue of Sweat Equity) Regulations, 2002, the price 1 of sweat equity shares shall be not less than the higher of the following:
(a) The average of weekly high and low of closing prices of equity shares during last 6 months preceding the relevant date, or

(b) The average of weekly high and low of closing prices of equity shares during last 2 weeks, preceding the relevant date.

‘Relevant date’ for this purpose means the date which is 30 days prior to the date on which the meeting of general body shareholders is convened for the purpose of sweat equity shares.

Based on SEBI Regulations, the following prices are relevant to decide the minimum price at which shares are to be issued –
(a) The average of the weekly high and low of the closing prices of the 1 related equity shares during last six months preceding the relevant date= ₹ 275.00

(b) The average of the weekly high and low of the closing prices of the | related equity shares during last two weeks preceding the relevant 1 date= ₹ 314.00

The final price shall be based on the higher of the above two, that is 1314/ per share is minimum price at which shares can be issued.

Question 5.
Gama Pesticide Ltd. (GPL) is taking over Theta Fertilizer Ltd. (TFL). The shareholders of TFL would get 0.8 shares of GPL for each share held by them. The merger is not expected to yield in economies of scale and operating synergy. The relevant data of companies as follows:

 Particulars GPL TFL Net sales (₹ in crore) 335 118 Profit after tax (₹ in crore) 58 12 Number of shares (crore) 12 3 Earnings per share (₹ ) 4.83 4.00 Market value per share (₹ ) 30 20 Price-earnings ratio 6.21 5.00

You are required to calculate the following in respect of the resultant company after merger –
(a) Earnings per share
(b) Price-earnings ratio
(c) Market value per share
(d) Number of shares; and
(e) Total market capitalization.
Given, the shareholders of TFL would get 0.8 shares of GPL for each share | held by them. Hence, the share exchange ratio (swap) is 0.80 times.

 Number of shares of GPL Ltd. issued to shareholders of TFL Ltd. Share in TFL Ltd. Swap ratio = 3 crore shares 0.80 = 2.40 crore shares Total of shares of GPL Ltd. after the merger Shares of GPL (+) New shares issued to shareholders of TFL = 12 crore shares (+) 2.40 crore shares = 14.40 crore shares Combined profit post-merger PAT of GPL Ltd. (+) PAT of TFL Ltd. = ₹ 58 crores + ₹ 12 crores = ₹ 70 crores Combined EPS post-merger Total Profit post merger/Total shares post merger = ₹ 70 crores/14.40 shares = ₹ 4.8611 Combined P/E ratio post-merger [(PAT of GPL × P/E) + (PAT of TFL × P/E)]/Total PAT = [(58 cr. 6.21) + (12 cr. 5)]/70 = 6.00 times. Market price per share post-merger EPS post merger × P/E ratio post merger = ₹ 4.8611 × 6.00 = ₹ 29.1666 Total Capitalization post-merger Total Equity shares × Market price per share = 14.40 crore shares × ₹ 29.1666 = ₹ 420.00 crores (approximately)

Question 6.
Groves Ltd. and Wood Ltd. decided to merge and a new company Groves Wood Ltd. is formed. Following are the extracts from the financial records of Groves Ltd. and Wood Ltd.
(₹ in Lakh)

 EQUITY AND LIABILITIES Groves Ltd. Wood Ltd. (1) Shareholders’ funds (a) Share capital Equity Shares of ₹ 10 each 800 1,600 (b) Reserves and surplus Reserve fund 400 600 Surplus 600 700 (2) Current liabilities Trade payables 700 800 TOTAL 2,500 3,700 ASSETS (1) Non-current assets (a) Land and building 400 600 (b) Plant and machinery 900 1,500 (c) Intangible assets (goodwill) 100 200 (2) Current assets (a) Inventories 300 400 (b) Trade receivables 400 300 (c) Cash and cash equivalents 400 700 TOTAL 2,500 3,700

The assets and liabilities of both the companies, excluding the intangible assets are taken over by Groves Wood Ltd. (new company). Compute the total number of shares to be issued to the shareholders of Groves Ltd. and Wood Ltd. of the face value of ₹ 10 each fully paid-up at a premium of? 10 per share.
(₹ in Lakh)

 Particulars Groves Ltd. Wood Ltd. (1) Non-current assets (a) Land and building 400 600 (b) Plant and Machinery 900 1,500 (c) Intangible asset (Goodwill) – – (2) Current assets (i) Inventories 300 400
 Particulars Groves Ltd. Wood Ltd. (ii) Trade Receivables 400 300 (iii) Cash and Cash equivalents 400 700 Total Assets 2,400 3,500 Less: Current Liabilities Trade Payables 700 800 Hence, Net Assets (₹’ lakhs) 1700 2700 Issue Price (₹ 10 FV + ₹ 10 premium) ₹ 20 ₹ 20 Hence, Total Shares to be issued (Net Assets/Issue Price) 850 lakhs 1350 lakhs

Question 7.
Bell Limited is planning to merge with (take over) Ring Limited. The following is the data regarding both the companies:

 Particulars Bell Ltd. (₹) Ring Ltd. (₹) Paid-up Capital 40,00,000 24,00,000 (Fully Paid-Up Equity Shares of ₹ 10 each) Market Price of Shares 40 24 (Latest traded in Stock Exchange) Profit After tax (PAT) 20,00,000 14,40,000

What should be the basis of exchange ratio so that the Bell Limited gains?
Option I – Based on Earnings per share method:
Earnings per share (EPS): $\frac{\text { Profit after tax }}{\text { No. of Eq. shares }}$

 Particulars Bell Ltd Ring Ltd. Profit After tax (PAT) 20,00,000 14,40,000 No. of equity shares (FV = ₹ 10) 400000 240000 Hence, EPS (₹ ) ₹ 5.00 ₹ 6.00 $\frac{20,00,000}{400000}$$\frac{20,00,000}{400000}$ $\frac{14,40,000}{240000}$$\frac{14,40,000}{240000}$

Share Exchange (swap) Ratio = $\frac{\text { EPS of Ring Ltd. }}{\text { EPS of Bell Ltd. }}=\frac{6.00}{5.00}$ = 1.20 times

Hence, number of shares = Total shares of Ring Ltd. × swap ratio issued by Bell Ltd.
= 240000 × 1.20 times
Hence, number of shares issued by Bell Ltd. = 288000 shares

Option II – lased on Market Price share method:

 Particulars Bell Ltd Ring Ltd. Market price per share ₹ 40.00 ₹ 24.00

Share Exchange (swap) Ratio = $\frac{\text { MP of Ring Ltd. }}{\text { MP of Bell Ltd. }}=\frac{24.00}{40.00}$ = 0.60 times
Hence, number of shares = Total shares of Ring Ltd. × swap ratio issued by Bell Ltd.
= 24000 × 0.60 times
Hence, number of shares = 144000 shares
issued by Bell Ltd.

Conclusion:
As per the EPS basis, Bell Ltd. is required to issue 288000 shares for the takeover of Ring Ltd., whereas under the Market Price basis, Bell Ltd. shall issue only 144000 shares.
Hence, Bell Limited should offer exchange ratio on the basis of Market Price, as the takeover can be completed by issuing lesser number of shares.

Question 8.
Swan Limited is the holding company of Duck Limited. Swan Limited wants to merge Duck Limited with it. Swan Limited holds 30000 Equity Shares of ₹ 10 each fully paid up in Duck Limited. The following details are available with us:
(Value in ₹)

 Swan Ltd Duck Ltd. Paid-up Equity Shares 50,00,000 40,00,000 (FV ₹ 10 each) Market Price of Shares 50 25 (Latest traded in Stock Exchange) Profit After tax (PAT) 25,00,000 12,00,000

Calculate the No. of shares Swan Ltd. will issue to the shareholders of Duck Ltd.
If exchange ratio is on the basis of:
(i) Earning Per Share (EPS)
(ii) Market Price.
Section 230 of the Companies Act, 2013, enables companies to enter into a scheme of compromise and arrangement. As per Section 232(3), the Transferee Company shall cancel any previous shareholding in the Transferor Company. Such shares cannot be held in its own name or name of any trust or its subsidiary or associate companies.

In the given case, Swan Ltd. (prior to merger) holds 30000 shares in Duck Ltd. Hence, this shareholding shall be cancelled and new shares shall be issued only to the public shareholders of Duck Ltd.
Public sharcholding in Duck Ltd. = 400000 shares (-) 30000 shares = 370000
shares.
Option 1 – Based on Earnings per share:

 Particulars Swan Ltd Duck Ltd. Profit After tax (PAT) 25,00,000 12,00,000 No. of equity shares (FV = ₹ 10) 500000 400000 Hence, EPS H (₹) ₹ 5.00 ₹ 3.00

Share Exchange (swap) Ratio = $\frac{\text { EPS of Duck Ltd. }}{\text { EPS of Swan Ltd. }}=\frac{3.00}{5.00}$ = 0.60 times
Hence, number of shares issued = Total public shares of Duck Ltd. × by Swan Ltd. swap ratio
= 370000 × 0.60 times
Hence, number of shai’es issued = 222000 shares
by Bell Ltd.

Option II – Based on Market Price per share:

 Particulars Swan Ltd Duck Ltd. Market price per share ₹ 50.00 ₹ 25.00

Share Exchange (swap) Ratio = $\frac{\text { EPS of Duck Ltd. }}{\text { EPS of Swan Ltd. }}=\frac{25.00}{50.00}$

Hence, number of shares issued = Total public shares of Duck Ltd. × Swap ratio by Swan Ltd.
= 370000 × 0.50 times
Hence, number of shares issued = 185000 shares by Bell Ltd.

Question 9.
Balance Sheet of Smileheavy Ltd. as at 31-3-2017 reveals as under:

 Liabilities Amount ₹ 1,50,000 equity shares of ₹ 10/- each fully paid up 15,00,000 2,00,000 equity shares of ₹ 6/- each partly paid up 12,00,000 60,000 12% Cumulative Preference shares of ₹ 10/- each fully paid up 6,00,000 Secured Loans 14,00,000 Trade Payables 6,50,000 TOTAL 53,50,000 Assets Amount ₹ Land & Buildings 23,00,000 Furniture, Fixture & Fittings 3,90,000 Profit & Loss Account Debit Balance 13,00,000 Inventories 8,30,000 Trade Receivables 4,10,000 Balance with Bank 1,20,000 TOTAL 53,50,000

Current value of Land & Buildings is ₹ 30,00,000, Furniture, Fixture & Fittings is ₹ 2,50,000. Inventory is valued at ₹ 9,11,000. Debtors are expected to realize 90% of their book value.
Calculate the intrinsic value of per equity shares by Net Assets Method.
Computation of Net Asset Value:

 Particulars ₹ ₹ Current value of Land & Building 30,00,000 Current value of Furniture, Fixtures & Fittings 2,50,000 Valuation of inventories 9,11,000 Debtors (9096 of ₹ 4,10,000) 3,69,000 Balance with bank 1,20,000 Value of Total Assets 46,40,000
 Particulars ₹ ₹ Notional call on 2 lakh equity shares at ₹ 4 per share 8,00,000 Hence, Total Value of Assets 54,50,000 Long-term loan 14,00,000 Trade Payables 6,50,000 Total Value of Liabilities 20,50,000 Hence, Net Assets Value 34,00,000 Less: Preference capital 6,00,000 Hence, Total Intrinsic Value of Equity Shares 28,00,000 Total Number of Equity Shares (adjusted) 350000 Intrinsic Value per Equity Share (fully paid-up) ₹ 8.00 Intrinsic Value per Equity Share (partly paid-up) (₹ 8- ₹ 4) ₹ 4.00

Question 10.
The net profits earned during the last 5 years of XYZ Ltd. was (in lacs) 42, 47, 45, 39 and 47 respectively on the capital employed during all the period was 4 Crores. Market peers in the said industry expect 10% return of capital employed. You are required to calculate the goodwill of XYZ Ltd. using:
Capitalization of Average Profit Method and
Capitalization of Super Profit Method.
Computation of Average Profits for past 5 years:
Average Profits = $\frac{\text { Sum of profits }}{\text { No. of years }}=\frac{42+47+45+39+47}{5 \text { years }}$
Average Profits = ₹ 44 lakhs

Computation of Goodwill, based on Average Capitalization Method:
Average Profits (computed) = ₹ 44 lakhs
Return on Capital Employed = 10% p.a.(given)
Hence, Normal Capital Employed = $\frac{\text { Average Profit }}{\text { Return on Capital }}=\frac{\text { ₹ } 44 \text { lakhs }}{10 %}$
Hence, Normal Capital Employed = ₹ 4.40 cores

Given, Actual Capital Employed = ₹ 4.40 cores
Hence, Value of Goodwill = Normal Capital Employed (-) Actual Capital
= ₹ 4.40 cores – ₹ 4.00 cores
Hence, Value of Goodwill = ₹ 40 lakhs

Computation of Goodwill, based on Super Profit Method:
Average Profits (computed) = ₹44 lakhs
Actual Capital Employed = ₹ 4.00 crores (given)
Return on Capital Employed = 10% p.a.(given)

Hence, normal profits = Actual Capital Employed * Normal rate of return
= ₹ 4.00 crores * 10%
Hence, normal profits = ₹ 40 lakhs
Super Profits = Average Profits (-) Normal Profits
= ₹ 44 lakhs (-) ₹ 40 lakhs
Hence, Super Profits = ₹ 4 lakhs

Return on Capital Employed = 10% p.a.(given)
Hence, Goodwill = $\frac{\text { Super Profit }}{\text { Rate of return }}=\frac{4 \text { lakhs }}{10 \%}$
Hence, Value of Goodwill = ₹ 40 lakhs
(capitalization of super-profits)

Question 11.
Fast Growth Ltd. gave the following information with a request to calculate the value of each of its equity shares.)
(i) Subscribed capital consists of fully paid up shares as follows:
10 lakh 13% Preference shares of ₹ 10 each and 20 lakh Equity shares of ₹ 10 each
(ii) Profit after depreciation but before taxation is ₹ 180 lakh
(iii) Transfer to general reserve ₹ 34.50 lakh
(iv) Provision for taxation is 30%
(v) Expected dividend is 20% for the relevant industry.

 Particulars ₹ Profit after depreciation but before taxation 180,00,000 Less: Provision for tax at 30% (54,00,000) Profit after Tax 126,00,000 Less: Dividend for preference shares at 13% (13,00,000) Profits available for Equity Shareholders 113,00,000 Less: Transfer to General Reserve (34,50,000) Hence, Total Dividend to Equity shareholders 78,50,000 Number of Equity shares 20,00,000 Hence Dividend Per Share (DPS) [Dividend for Equity Shareholders/ No. of Equity shares) 3.925 Given, Dividend Capitalization Rate 20% Hence, Value per Equity Shares (based on dividend rate) [DPS/ Div. Capitalization Rate] 19.625

Question 12.
From the following data noticed from published financials, ascertain intrinsic value of equity shares:

 Goodwill ₹ 56,400 Market value of other assets ₹ 18,00,000 Debentures ₹ 10,00,000 Trade payables ₹ 2,50,000 Preference capital ₹ 2,00,000

Equity capital consists of 10,000 shares of ₹ 10 each fully paid up.

 Particulars ₹ ₹ Goodwill 56,400 Market Value of Other assets 18,00,000 Total Assets 18,56,400 Debentures 10,00,000 Trade payables 2,50,000 Preference capital 2,00,000 Total Assets 14,50,000 Hence, Net Asset Value 4,06,400 Number of Equity Shares 10000 Hence, Net Asset Value per share [Net Asset Value/No. of Equity Shares] ₹ 40.64

Question 13.
The Managing Director of a company decides that his company will not pay any dividend till he survives. His current life expectancy is 20 years. After that time, it is expected that the company could pay dividend of ? 30 per share indefinitely.
At present the company could afford to pay ₹ 5 per share forever. The shareholders of the company expect return on equity @ 10%. Find out:
(i) What would be the share price at the end of 20 years?
(ii) What would be the present value of a share using discounting factor of 0.1468 (at 10% for 20 yearn period)?
(iii) What is the current price of a share if dividend payment is ₹ 5 per share?
(iv) What is the loss to the shareholders in the aforesaid scenario?
Given, information –
Expected Dividend at the end of 20 years = ₹ 30 per share
Constant Dividend to be paid today = ₹ 5 per share
Shareholders Expected rate of return (ROI) =10% p.a.

As per Managing Director’s policy:
(i) Where the company doesn’t pay dividend today, it shall be able to pay a dividend of ₹ 30 per share at the end of 20 years, (end of tenure of the Managing Director)
Hence, value of the share at the end of 20 years = DPS/Expected ROI
= 30/10%
Hence, value of the share at the end of 20 years = ₹ 300

(ii) Based on computation in (i), the value per share at the end of 20 years shall be ₹ 300.
Considering, the present value factor for 10% at the end of 20 years = 0.1468
Hence, present value of share = 300 × 0.1468
= ₹ 44.04

(iii) Where dividends are paid today onwards, the DPS shall be ₹ 5.00 p.a.
Hence, value of the share = DPS/Expected ROI
= 5.00/10%
= ₹ 50.00

(iv) Where the Managing Director’s proposal is accepted the present value of benefit of shareholders shall be ₹ 44.04 per share. On the other hand, where the current dividend policy is adopted, the present value of benefits to the equity shareholder shall be ₹ 50.00 per share.
Thus, loss to shareholder due to MD proposal = ₹ 50.00 (-) ₹ 44.04
= ₹ 5.96 per share

Question 14.
From the following information determine the possible value of brand:

 Particulars ₹ ‘in lakhs Profit After Tax (PAT) 2,000 Tangible Fixed Assets 8,000 Identifiable intangible assets other than the brand 1,200 Weighted average cost of capital 15% Normal return on tangible assets 20% Capitalization factor for intangible assets 25%

 Particulars ₹ in Lakhs Profit After Tax (PAT) 2,000 Less: Profit allocated to tangible assets (20% of ₹ 8.000) (1,600) Profit attributable to intangible assets including brand 400 Capitalization rate for Intangible Assets 25% Hence, Capitalized value of intangible assets including brand [Profit on Intangibles/Capitalization Rate] [ ₹ 400 lakhs/25%] 1,600 Less: Identifiable intangible assets other than the Brand (1,200) Hence, approximate Value of the Brand 400

Question 15.
From the following information calculate the value of a share if you want to:
(i) buy a small lot of shares;
(ii) buy a controlling interest in the company.

 Year Profit (₹) Capital Employed (₹) Dividend (%) 2015 24,50,000 3,50,00,000 15 2016 40,00,000 5,00,00,000 18 2017 60,00,000 6,00,00,000 20 2018 72,00,000 6,00,00,000 25

The market expectation is 15% from the similar industry.
(i) Buying a small lot of shares:
Where an investor buys in small lots, the dividend yield method is j most appropriate for valuation of shares. For calculation of average | dividend, the weighted average will be more appropriate since dividend rate is rising, i.e. there is a clear visible ascending trend.

 Year Rate of Dividend (%) Weight Rate × Wt. 2015 15 1 15 2016 18 2 36 2017 20 3 60 2018 25 4 100 Total 10 211

Weighted Average dividend = Sum of (Rate × Wt)/Sum of weights Rate
= 211/10
= 21.10 %

Value of a share = $\frac{\text { Average dividend rate }}{\text { Market expectation }} \times 100$
= $\frac{21.10}{15} \times 100$
Value per share (for small lots) = ₹ 140.67 per share

(ii) Buying a controlling interest in the company:
Where an investor buys a larger stake in a company, so as to give j him control or capacity to influence the decision-making, the profit method is most appropriate for valuation of shares. For calculation of average dividend, the weighted average will be more appropriate since dividend rate is rising, i.e. there is a clear visible ascending trend.

 Year Profit (₹) Capital Employed (₹) Yield (%) (Profit/ Cap. Empl.) Weight Yield × Wt. 2015 24,50,000 3,50,00,000 7.00 % 1 7.00 2016 40,00,000 5,00,00,000 8.00% 2 16.00 2017 60,00,000 6,00,00,000 10.00% 3 30.00 2018 72,00,000 6,00,00,000 12.00% 4 48.00 Total 10 101.00

Weighted Average dividend Rate = Sum of (Yield × Wt)/Sum of weights = 101/10 = 10.10%
Value of a share = $\frac{\text { Average dividend rate }}{\text { Market expectation }} \times 100$
= $\frac{10.10}{15} \times 100$
Value per share (control interest) = ₹ 67.33 per share

Question 16.
Firm A is profit-making firm whereas Firm B has accumulated losses S of ₹ 1000 lakh. Firm A acquires firm B The projected profits before taxes, of firm A, for the next three years are given in the table:

 Year Projected Profit (₹ in lakh) 1 350 2 500 3 700

Determine the present value of tax gains which the Firm A gains on account of merger with Firm B. Assume corporate tax rate 35 per cent. Discount rate 12 per cent. Present Value (PV) factor at 12%: one year 0.893, two year 0.797, three year 0.712.
Given, Existing losses of Firm B = ₹ 1000 lakhs and expected profits of the merged entity for the next three years.

As per Section 72A of the Income Tax Act, 1961, the accumulated losses of the amalgamating company can be set off against the profits.

Due to such set-off and carry-forward benefit, the taxable profits reduced to the extent of set-off. As a result, the merged entity saved income tax.
Out of the total loss of ₹ 1000 lakhs, the set-off shall be equal to the annual taxable profits.

 Particulars Year-1 (₹ lakhs) Year-2 (₹ lakhs) Year-3 (₹ lakhs) Profit before tax (PBT) 350 500 700 Set-off allowed against loss of Firm B 350 500 150 (total set-off = total loss = ₹ 1000 lakh) Hence, Tax Saved at 35% (Set-off allowed’ Tax rate) 122.50 175.00 52.50 PV factor at 12% 0.893 0.797 0.712 PV of tax saved 109.39 139.48 37.38

Present Value of Total Tax Saved = 109.39 (+) 139.48 (+) 37.38
= ₹ 286.25 lakh

Question 17.
The following information is available in respect of acquiring company FM Ltd. and target company VM Ltd.

 Particulars FM Ltd. VM Ltd. Remarks Earnings after Tax ₹ 2000 lakhs ₹ 400 lakhs PAT No. of shares issued and paid-up 200 lakhs 100 lakhs Face Value ₹ 10 P/E Ratio 10 5 –

You are required to calculate:
(i) Swap Ratio on Current Market Price. (2 Marks)
(ii) EPS of FM Ltd. after acquisition (1 Mark)
(iii) Expected Price per share of FM Ltd. after acquisition, assuming PE Ratio of FM Ltd. remaining unchanged.
(iv) Total Value of Merged Company.

 Particulars FM Ltd. VM Ltd. Total Earnings after Tax ₹ 2000 lakhs ₹ 400 lakhs Number of Equity Shares 200 lakhs 100 lakhs Earnings per share (EPS) ₹ 10.00 ₹ 4.00 P/E Ratio (given) 10 times 5 times
 Particulars FM Ltd. VM Ltd. Market Price per share (EPS x PE ratio) ₹ 100.00 ₹ 20.00
 Swap Ratio (based on Market Price per share) $\frac{\text { Market price of VM Ltd. }}{\text { Market price of FM Ltd. }}=\frac{\text { ₹ } 20}{\text { ₹ } 100}$$\frac{\text { Market price of VM Ltd. }}{\text { Market price of FM Ltd. }}=\frac{\text { ₹ } 20}{\text { ₹ } 100}$ = 20 times Swap Ratio = 0.20 times i.e. share of FM Ltd. for every 5 shares in VM Ltd. Number of shares of FM Ltd. issued to shareholders of VM Ltd. Share in VM Ltd. × Swap ratio of FM Ltd. issued to shareholders of VM Ltd. = 100 lakhs shares × 0.20 = 20 lakhs shares Total of shares of FM Ltd. after the merger Shares of FM (+) New shares issued to shareholders of VM = 200 lakhs shares (+)20 lakhs shares = 220 lakhs shares Combined profit post-merger PAT of FM Ltd. (+) PAT of VM Ltd. = ₹ 2000 lakhs + ₹ 400 lakhs = ₹ 2400 lakhs Combined EPS post-merger Total Profit post-merger/Total shares post-merger = ₹ 2400 lakhs/220 lakhs shares = ₹ 10.9090 Combined P/E ratio post-merger (assumed) = 10.00 times Market price per share post merger EPS post merger X P/E ratio post merger = ₹ 10.9090 X 10.00 = ₹ 109.09 Total Capitalization post merger Total Equity shares × Market price per share = 220 lakhs shares × ₹ 109.0909 = ₹ 2400. lakhs (approximately)

Question 18.
Management of a Company seeks your advice whether to go for sales in a nearby foreign country. They have furnished the following historical data:
Units – 4200, Wages – ₹ 12,600, Materials – ₹ 21,000, Fixed cost – ₹ 7,000, Variable cost – ₹ 2,100, Total -142,700.
Selling price in domestic market is ₹ 15. In the foreign land about 800 units may be sold only at ₹ 10 and additional 25 paise per unit will be expensed as freight etc. What would be your advice?