Financial Management

(PGDM: 2022-24)

Session -10: Valuation of Shares

Sriranga Vishnu
Faculty (F&A Area)
 Shares – Some Basics
• A company may issue two types of shares:
– Ordinary shares, and
– Preference shares

• Common Stock – Book Value (Capital + Retained

Earnings)
– Authorized, Issued and Paid-up Share Capital
– Issued at Par Value (Face value), – Minimum amount that
the investor must pay on a share
– Additional Paid-in Capital; Share premium
– Issuance Costs are deducted from the amount received
– Public Issue, Rights Issue, Private Placement
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 Types of Ownership in Corporations

• Preference Shares – Cumulative and non-cumulative

– The stock holders get preference over Common Equity
holders in Dividends, Liquidation, etc.
– Dividend non-payment – not subject to legal recourse
– Dividend- Not an expense; Distribution of owners’ equity
– Dividends- Not tax deductible; No tax shield
– Convertible preferred stock can be converted into specified
number of common stock
– Normally preferred stocks are indefinitely outstanding; but
can be redeemable as well
 Intrinsic Value and Stock Prices

• Outside investors, corporate insiders, and analysts use a

variety of approaches to estimate a stock’s intrinsic value
(P0)

• In equilibrium we assume that a stock’s price equals its

intrinsic value.
– Outsiders estimate intrinsic value to help determine which
stocks are attractive to buy and/or sell.
– Stocks with a price below (above) its intrinsic value are
undervalued (overvalued).

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 Valuation of Preference Shares

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 Valuation of Ordinary Shares

• The valuation of ordinary or equity shares is

relatively more difficult
– The rate of dividend on equity shares is not known;
also, the payment of equity dividend is discretionary
– The earnings and dividends on equity shares are
generally expected to grow, unlike the interest on
bonds and preference dividend

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 Valuation of Ordinary Shares

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 Valuation of Ordinary Shares

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 Valuation of Ordinary Shares

• Total Return (Rs) = Dividend + Capital Gain

• Total Return (%) = Dividend Yield + Capital Gain Yield

• Dividend Yield = D1 / Po

• Capital Gain Yield = (P1 – Po) / Po

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 Multiples Method

• For valuation purpose, analysts also use multiples to value

stocks. Generally these multiples are used:
– Price/Earnings
– Price/CF
– Price/Sales
• Method: Based on comparable firms, appropriate P/E is
estimated. This is then multiplied by the expected earnings to
calculate an estimate of the stock price

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Thank You