Valuation

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Mrudulatha (Querist)
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19 February 2009 While valuing goodwill on the basis of net assets method proposed dividend & non trade investments is not taken into consideration. Then why is taken in the case of valuation of shares?
Also, while computing Future Maintanable Profits proposed dividend or dividend paid is added back to the profit. Why? And income from non trade investments is deducted. why? I understand that this is the method but could you please tell me the basis behind for better understanding.

Vikram

Vikram (Expert)
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19 February 2009 Pls refer below mentioned reply for your questions
Q1 . While valuing goodwill on the basis of net assets method proposed dividend & non trade investments is not taken into consideration. Then why is taken in the case of valuation of shares?
Ans. Your goodwill is depending on your capacity to earn profit and not current profit. Since rate of proposed dividend is not fixed as well as dividend will be declared or not is also not certain, hence proposed dividend is not included in calculation of goodwill. Similarly for trade investment as you may sell them off any time during the year hence certainty is not there.
But valuation of shares shows how much you have earned per share till date.

Q 2. Also, while computing Future Maintainable Profits proposed dividend or dividend paid is added back to the profit. Why? And income from non trade investments is deducted. why?
Ans. As the name suggest future maintainable profit means profit which is going to be maintained in future hence all extraordinary expenses as well income shall be added back or deducted.
I think this will resolve your all the doubts.