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.
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