Valuation of goodwill

Ankita I dont think that we do that assuming half profit ploughed back but it is just to arrive to average capital employed. E.g. Capital at the beginning 100 and profit during the year 50 then terminal capital will be 150 and avg capital employed is 125.

So if we deduct half of 50 ( profit during the year) from 150 (terminal capital ) we get the avg capital employed i.e. 125. This is just a mathematical tect to calculate the avg.

Will be happy to hear more in this regards from others

Ashish is right, its just a mathematical derivation from basic formula.  Here I am giving the derivation, hope it will help in better understanding -

Avg. Capital Employed = Opening capital + closing capital / 2

Now Opening capital = Closing capital - profits after tax (put this value in above formula)

Avg. Capital = (Closing Capital - Profits after tax) + Closing capital / 2

Avg. Capital = 2 closing capital - profits after tax / 2

 Avg. Capital = Closing capital - half profits after tax

Thus above formula is directly derived from basic formula.  You wont get opening capital in every question.  There you can use this formula.

 oh ok that simple, huh? i did think of the mathematical derivation thing but then i thought there might be deeper meaning behind the adjustment. anyway, thanks both for the help. appreciate it.

thanks mohit

Good anish and Mohith

We came to know how to calculate the average capital employed but  before that we should know what is closing capital employed or how to calculate closing capital employed.

Please state that.

Thank u Mohit and Ashish

I have a doubt.

While valuing goodwill, I see sometimes we use average capital employed & sometimes closing capital employed. Please explain as to how should we decide if we have to use Average capital employed or closing capital employed other than a case where it is specifically given in the question or a case where opening and closing capitals both are given.