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discounted at 13% and 10%,
respectively 90,072 93,690
Present value of Rs. 6,00,000 due in 2
years, discounted at 13% and 10%,
compounded yearly, respectively 4,69,800 4,95,600

Liability component 5,59,872 5,89,290 (29,418)
Equity component 84,282* 40,710** 43,572
Total 6,44,154 6,30,000 14,154
*See Note
**6,30,000 – 5,89,290 = 40,710
Journal Entries
Rs. Rs.

9% Debentures (Liability component) Dr. 5,59,872
Profit and loss A/c (Debt settlement expense) Dr. 29,418

To Bank A/c 5,89,290
(Being the repurchase of the liability component recognised)
9% Debentures (Equity component) Dr. 84,282

To Bank A/c 40,710
To Retained Earnings A/c 43,572
(Being the cash paid for the equity component recognised)

Q9 (Nov. 21)

i) 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 Rs. 10. Entity XYZ’s after-tax maintainable profits are
estimated at Rs. 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.
ii) Based on the facts given in the aforementioned part (i), assume that Entity A estimates the fair value of
the shares it owns in company XYZ using a net asset valuation technique. The fair value of company
XYZ’s net assets including those recognised in its balance sheet and those that are not recognised is Rs.

8,50,000. Determine the fair value of Entity A’s investment in XYZ’s shares.
SOLUTION

i) 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) Rs. 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) Rs. 8,40,000
23. 13