Capitalization method
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This document describes the capitalization method of valuing average profits to determine a firm's capitalization value and goodwill. The capitalization value is calculated by taking the average profits and dividing by the normal rate of return, then multiplying by 100. Goodwill is the difference between the total capitalized value and the net assets. An example is provided where a firm earns average profits of Rs. 65,000 at a 10% normal rate of return, with total assets of Rs. 680,000 and liabilities of Rs. 180,000, resulting in a capitalization value of Rs. 650,000 and goodwill of Rs. 150,000.
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capitalisation financial management fm
The document discusses capitalization, which refers to the total amount of long-term funds available to a company including share capital, reserves, and long-term debts. It can be determined using the cost theory by adding fixed asset costs, working capital, and establishment costs, or the earnings theory by capitalizing estimated earnings based on a fair rate of return. Overcapitalization occurs when a company's capital exceeds its earning capacity, while undercapitalization is the reverse with actual capital lower than warranted. Theories, causes, effects, and remedies of (over/under)capitalization are provided.
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capitalisation financial management fm
The document discusses capitalization, which refers to the total amount of long-term funds available to a company including share capital, reserves, and long-term debts. It can be determined using the cost theory by adding fixed asset costs, working capital, and establishment costs, or the earnings theory by capitalizing estimated earnings based on a fair rate of return. Overcapitalization occurs when a company's capital exceeds its earning capacity, while undercapitalization is the reverse with actual capital lower than warranted. Theories, causes, effects, and remedies of (over/under)capitalization are provided.
Factors affecting the value of goodwill
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Goodwill in Partnerships is more simple but still governed by IFRS3: Business combinations and IAS 38.
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The document discusses dividend policy and provides details about:
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2. Different types of dividends including cash dividend, stock dividend, property dividend, and debenture dividend.
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Capitalisation
1. Capitalization refers to the total amount of long-term funds available to a company including share capital, reserves, debentures, and long-term loans.
2. There are two main theories of capitalization - the cost theory which is based on the cost of assets, and the earnings theory which is based on expected earnings and rate of return.
3. Overcapitalization occurs when a company's capital exceeds what is needed based on its earning capacity, resulting in a lower return on capital. Undercapitalization is the opposite, where the capital is too low relative to earning capacity. Maintaining fair capitalization is ideal for a company.
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Capital budgeting is a process of evaluating investments and huge expenses in order to obtain the best returns on investment.
An organization is often faced with the challenges of selecting between two projects/investments or the buy vs replace decision. Ideally, an organization would like to invest in all profitable projects but due to the limitation on the availability of capital an organization has to choose between different projects/investments.
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Capital expenditures are huge and have a long-term effect. Therefore, while performing a capital budgeting analysis an organization must keep the following objectives in mind:
1. Selecting profitable projects
An organization comes across various profitable projects frequently. But due to capital restrictions, an organization needs to select the right mix of profitable projects that will increase its shareholders’ wealth.
2. Capital expenditure control
Selecting the most profitable investment is the main objective of capital budgeting. However, controlling capital costs is also an important objective. Forecasting capital expenditure requirements and budgeting for it, and ensuring no investment opportunities are lost is the crux of budgeting.
3. Finding the right sources for funds
Determining the quantum of funds and the sources for procuring them is another important objective of capital budgeting. Finding the balance between the cost of borrowing and returns on investment is an important goal of Capital Budgeting.
The following are the two methods:
A) Traditional Method
1. Pay back period method
2. Improvement of traditional approach
3. Rate of Return Method or Accounting Method
B) Time adjusted method or discount methods
4. Net Present Value method
5. Internal Rate of Return Method
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This document discusses methods for valuing goodwill of a business. It defines goodwill as the value of a firm's reputation that generates profits above normal levels, known as super profits. The value of goodwill is affected by factors like location, nature of business, management efficiency, time in business, market situation, and special advantages. Goodwill needs to be valued when partners join, retire, die, or the business dissolves. Common valuation methods include average profits, weighted average profits, super profits, capitalization of average/super profits, and present value of super profits. Illustrative examples are provided for each method.
Goodwill
1. The document presents methods for calculating goodwill in a business. Goodwill represents the value of assets like brand name, customer base, supplier relationships, and workforce that are not separately recognized in a business acquisition.
2. There are three main methods discussed: average profits method, super profits method, and capitalization method. The average profits and super profits methods calculate goodwill as a multiple of average or excess profits. The capitalization method estimates goodwill as the difference between total capitalized value and net assets.
3. Examples are provided to demonstrate calculating goodwill under the super profits capitalization method. Goodwill is estimated as super profits multiplied by a capitalization rate based on normal returns.
Valuation of Goodwill for class 12
The document discusses the concept of goodwill in business valuation. It defines goodwill as the favorable reputation and brand name of a business that generates profits year after year. Factors that contribute to goodwill are good public relations, regular customers, quality maintenance, management skills, location, and employee relations. Methods discussed to value goodwill include the average profits method, super profits method, and capitalization method. The average profits and capitalization methods involve calculating average or super profits and capitalizing them based on a normal rate of return to determine goodwill value.
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- Gordon's model similarly values shares based on dividends but also incorporates the growth rate of earnings from retained profits. It argues investors prefer dividends over capital gains.
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Hand written Notes of auditing:-
1) Auditing and its objectives
2) Audit plan and its characteristics
3) Internal check advantages/ disadvantages?
4) Vouching and its objectives?
5) Auditors and its provisions?Amalgamation
An amalgamation occurs when two or more organizations cease to exist and their resources, assets and roles are consolidated into a new entity. There are two types of amalgamation - a merger, where organizations consolidate voluntarily, and a takeover, where a larger organization takes control of a smaller one. Amalgamations allow companies to achieve economies of scale, synergies, risk diversification and other benefits. They can be accounted for using either the pooling of interest method or the purchase method. The document then provides several examples of amalgamations between companies in India and their objectives.
Capitalisation
1. Capitalization refers to the total amount of long-term funds available to a company including share capital, reserves, debentures, and long-term loans.
2. There are two main theories of capitalization - the cost theory which is based on the cost of assets, and the earnings theory which is based on expected earnings and rate of return.
3. Overcapitalization occurs when a company's capital exceeds what is needed based on its earning capacity, resulting in a lower return on capital. Undercapitalization is the opposite, where the capital is too low relative to earning capacity. Maintaining fair capitalization is ideal for a company.
Financial statement analysis
The document discusses various types of financial statement analysis including comparative statements, common size statements, trend analysis, and ratio analysis. It provides an example of a comparative balance sheet analysis for a company from 2006 to 2007. The analysis shows increases in fixed assets, long term liabilities, equity, and current assets. It also shows an increase in sales, gross profit, and net profit, indicating the overall financial position and profitability of the company improved from 2006 to 2007.
Transfer pricing
This document discusses transfer pricing, which refers to the price at which divisions within a company transact with each other. It provides definitions of transfer pricing and outlines some key issues like how transfer prices impact revenue and influence whether managers prefer customers or suppliers that are internal or external to the company. The document then describes several methods that can be used to determine transfer prices, such as using market rates, negotiated prices, or cost-plus models. It provides an example of calculating an optimal transfer price between wood and paper divisions of a company. The summary concludes by noting how transfer prices can be manipulated for tax purposes in multinational companies.
Advantages and disadvantages of venture capital
Venture capital provides funding and valuable services to companies including mentoring, alliances, and facilitating exit. Venture capitalists expect a return within 3-5 years, so the funding may not be suitable for companies with longer timelines. Securing venture capital requires a detailed business plan and legal fees, and giving up some ownership of the company.
Valuation of goodwill
This document discusses the valuation of goodwill. It defines goodwill as the present value of a firm's anticipated excess earnings above a normal rate of return. Goodwill is an intangible asset that arises from factors like business reputation, customer loyalty, and trade name. The document outlines several reasons why goodwill needs to be valued, such as when a business is sold, partners are added or retired, or a firm is converted to a company. It then describes different methods that can be used to value goodwill, including average profits methods, super profits methods, and capitalization methods.
Redemption of preference share
Preference shares represent partial ownership in a company and carry preferential rights to dividends and assets over common stock. Preference shares can be redeemed by the company at par or at a premium using profits, reserves, or proceeds from new share issues. Upon redemption, the company must transfer an amount equal to the nominal value of shares redeemed to a capital redemption reserve account to maintain capital levels.
Financial Statement Analysis
This document discusses financial statement analysis, which involves reviewing a company's financial statements like the income statement, balance sheet, and cash flow statement to assess the company's financial health and performance over time and relative to other companies. Key aspects of financial analysis include evaluating profitability, solvency, liquidity, and stability using tools like ratio analysis, comparative statements, common size statements, and trend analysis. The results of financial analysis are used by various interested parties like management, investors, and creditors to evaluate financial performance, position, operating efficiency, and predict future performance.
Reconstruction of Companies
Reconstruction is a process where a company reorganizes its legal, operational, ownership and other structures. It involves transferring a company's business to a new company, with the old company being liquidated. Shareholders of the old company receive equivalent shares in the new company. Reconstruction is required when a company has losses for many years and its financial statements do not accurately reflect its position. There are two types of reconstruction - external, where a new company purchases the business of the old company, and internal, which involves reorganizing the company's capital structure through steps like reducing share capital to write off losses. Internal reconstruction methods include altering share capital, varying shareholder rights, and reducing share capital through a special resolution.
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This document provides an overview of cash management and marketable securities management. It discusses the importance of cash for businesses and the motives for holding cash such as transactional, precautionary, speculative, and compensating motives. The objectives and techniques of cash management are described, including accelerating cash inflows through prompt payments, decentralized collections, and lockbox systems, as well as slowing cash outflows through paying on last dates, adjusting payroll funds, and centralizing payments. The document also covers the management of marketable securities, including why businesses invest in these liquid short-term instruments and factors to consider like safety, maturity, liquidity, and yield when choosing securities.
Financial instruments
The document discusses key concepts related to accounting for financial instruments under IAS 32, IAS 39 and IFRS 9 such as definition of financial instruments, classification of financial assets and liabilities, initial measurement, amortized cost method, fair value accounting, transaction costs, compound instruments and other requirements. It provides examples to explain concepts such as business model, classification of instruments as amortized cost or fair value, treatment of transaction costs, calculation of amortized cost and separation of compound instruments into liability and equity components.
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Capital budgeting theory
Capital budgeting is a process of evaluating investments and huge expenses in order to obtain the best returns on investment.
An organization is often faced with the challenges of selecting between two projects/investments or the buy vs replace decision. Ideally, an organization would like to invest in all profitable projects but due to the limitation on the availability of capital an organization has to choose between different projects/investments.
What are the objectives of Capital budgeting?
Capital expenditures are huge and have a long-term effect. Therefore, while performing a capital budgeting analysis an organization must keep the following objectives in mind:
1. Selecting profitable projects
An organization comes across various profitable projects frequently. But due to capital restrictions, an organization needs to select the right mix of profitable projects that will increase its shareholders’ wealth.
2. Capital expenditure control
Selecting the most profitable investment is the main objective of capital budgeting. However, controlling capital costs is also an important objective. Forecasting capital expenditure requirements and budgeting for it, and ensuring no investment opportunities are lost is the crux of budgeting.
3. Finding the right sources for funds
Determining the quantum of funds and the sources for procuring them is another important objective of capital budgeting. Finding the balance between the cost of borrowing and returns on investment is an important goal of Capital Budgeting.
The following are the two methods:
A) Traditional Method
1. Pay back period method
2. Improvement of traditional approach
3. Rate of Return Method or Accounting Method
B) Time adjusted method or discount methods
4. Net Present Value method
5. Internal Rate of Return Method
6. Profitability Index Method
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This document provides an overview of chapter 1 of a cost accounting course. It defines key concepts such as cost, cost accounting, and cost accountancy. Cost is defined as the actual or nominal expenditure incurred on or attributable to a specified thing or activity. Cost accounting is the process of accounting for costs from when expenditure is incurred until it is related to cost centers or units. Cost accountancy applies costing and cost accounting principles and techniques to ascertain profitability and present relevant information for managerial decision making. The document explains the differences between costing, cost accounting, and cost accountancy in terms of their scope, functions, periodicity, and persons involved.
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1) Income from salary includes any remuneration received for services rendered to an employer.
2) Key allowances like DA, HRA are fully taxable while some allowances receive partial exemptions.
3) Perquisites provided by employers are also taxed, including rent-free housing, cars, interest-free loans, etc. Valuation methods differ based on type of perquisite.
Calculation of goodwill
This document discusses methods for valuing goodwill of a business. It defines goodwill as the value of a firm's reputation that generates profits above normal levels, known as super profits. The value of goodwill is affected by factors like location, nature of business, management efficiency, time in business, market situation, and special advantages. Goodwill needs to be valued when partners join, retire, die, or the business dissolves. Common valuation methods include average profits, weighted average profits, super profits, capitalization of average/super profits, and present value of super profits. Illustrative examples are provided for each method.
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The document discusses financial planning and capitalization. It covers estimating capital requirements, theories of capitalization, and determining if a company is under or over capitalized. The key points are:
- Companies must estimate fixed and working capital needs. The cost and earnings theories of capitalization are used to determine how much funding is required.
- Under or over capitalization can be identified by comparing a company's book value per share to its real value, calculated using earnings and industry capitalization rate.
- If book value is greater than real value, the company is over capitalized. If book value is less than real value, the company is under capitalized. Book value equal to real value means proper capitalization
Valuation methods used in mergers & acquisitions
The document discusses various valuation methods used in mergers and acquisitions, including:
1) Asset-based valuation which values a company based on the book value of its assets and liabilities.
2) Earnings-based valuation which values a company based on capitalizing its earnings or using its price-earnings ratio.
3) Discounted cash flow valuation which values a company based on the present value of its future free cash flows.
The document recommends using multiple valuation methods and averaging the results to determine a company's fair value for an acquisition.
Valuation methods used in mergers & acquisitions
The document discusses various valuation methods used in mergers and acquisitions, including:
1) Asset-based valuation which values a company based on the book value of its assets and liabilities.
2) Earnings-based valuation which values a company based on capitalizing its earnings or using its price-earnings ratio.
3) Discounted cash flow valuation which values a company based on the present value of its future free cash flows.
The document recommends using multiple valuation methods and averaging the results to determine a company's fair value for an acquisition.
3.7 making investment decisions (part 2) - moodle
1. This document provides examples and practice questions for students to test their understanding of selecting financial strategies and investment appraisal techniques, including payback period, average rate of return, and net present value.
2. Students are asked to calculate and compare the results of different investment options using the three techniques and to consider both quantitative and qualitative factors that influence investment decisions.
3. Key risks and uncertainties that could impact investment decisions are also discussed, such as market stability, cost and revenue forecasts, and potential competitor reactions.
Chapter 8.pptx
This document covers various capital budgeting techniques including net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, average accounting return, and profitability index. It provides examples and explanations of how to calculate each metric and compares their advantages and disadvantages. It emphasizes that NPV is the best method since it incorporates the time value of money and considers all cash flows rather than just the initial period. The document also highlights potential issues with techniques like IRR when projects have multiple rates of return or non-conventional cash flows.
3.7 making investment decisions (part 2) - moodle
1) The document provides examples of questions and tasks related to selecting financial strategies and investment appraisal techniques.
2) It includes examples of calculating payback period, average rate of return (ARR), and net present value (NPV) for different investment options.
3) The quantitative results of the three techniques - payback period, ARR, and NPV - are summarized in a table to compare different investment machines and determine which represents the better investment.
Capital budgeting
From the given information, calculate the profitability index of the project:
- Initial investment required is Rs. 50 lacs
- Present value of future cash flows are:
Year 1: Rs. 9,09,000
Year 2: Rs. 9,91,680
Year 3: Rs. 11,25,950
Year 4: Rs. 12,29,460
Year 5: Rs. 15,52,250
Total present value of future cash flows = Rs. 58,09,340
Profitability Index = Present value of future cash flows / Initial investment
= Rs. 58,09,340 / Rs. 50,00,000
= 1.1618
Therefore, the
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Capitalization method
- 1. Capitalization method 1.Capitalization value of average profit method Under this method we calculate the average profits and then assess the capital needed for earning such average profits on basis of normal rate of return. such capital is called capitalization value of average profit.
- 2. • Here, goodwill Is the difference between total capitalized value of the firm and net assets of the firm Goodwill=capitalized value of the firm-net assets Capitalized value=average profit/normal rate of return*100 Net assets =total assets-external liabilities
- 3. example A firm earns rs 65000 as its average profits .the usual rate of earnings is 10%.the total assets of the firm amounted to rs 680000 and liabilities are rs 180000.
- 4. calculation • Total capitalization value=65000/10*100=650000 • Net assets=680000-180000=500000 • Goodwill=total capitalization value-net assets =650000-500000=150000