Entity A owns 250 ordinary shares in company XYZ, an unquoted company. Company XYZ has a total share capital of 5,000 shares with nominal value of…
CA Final · Financial Reporting · MTP · November 2024
Entity A owns 250 ordinary shares in company XYZ, an unquoted company. Company XYZ has a total share capital of 5,000 shares with nominal value of 10. Entity XYZ's after-tax maintainable profits are estimated at 70,000 per year. An appropriate price/earnings ratio determined from published industry data is 15 (before lack of marketability adjustment). Entity A's management estimates that the discount for the lack of marketability of company XYZ's shares and restrictions on their transfer is 20%. Entity A values its holding in company XYZ's shares based on earnings. Determine the fair value of Entity A's investment in XYZ's shares.
Suggested Answer and Working Notes:
An earnings-based valuation of Entity A's holding of shares in company XYZ could be calculated as follows: Particulars Unit Entity XYZ's after-tax maintainable profits (A) 70,000 Price/Earnings ratio (B) 15 Adjusted discount factor (C) (1-0.20) 0.80 Value of Company XYZ (A) x (B) x (C) 8,40,000 Value of a share of XYZ = 8,40,000 ÷ 5,000 shares = 168 The fair value of Entity A's investment in XYZ's shares is estimated at 42,000 (that is, 250 shares x 168 per share).
Topics: Ind AS 113
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