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Overview
• VALUATION connects risk & return to
ascertain the price of an asset.
Valuation
presented by
C.K.S. Almonte

Source: Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 6: Interest Rates and Bond Valuation p. 281. Addison Wesley.
2

cont. Overview cont. Overview

• Kinds of Value • Factors Affecting Value
– BOOK VALUE refers to an asset’s value as per the
– size & timing of the projected CFs
balance sheet (B/S).
– risk of the projected CFs
– LIQUIDATION VALUE refers to how much an asset could
be sold for. – required return of the investor(s)

– MARKET VALUE refers to “… the observed value for the

asset in the marketplace.” (p. 231)

– INTRINSIC (ECONOMIC or FAIR) VALUE refers to the

current value of an asset’s projected cash flows (CFs).

Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation and Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation and
Characteristics of Bonds, p. 231. Pearson Prentice Hall.
3 Characteristics of Bonds, p. 232. Pearson Prentice Hall.
4

cont. Overview
• Debt vs. Equity Capital
Characteristic Debt Capital Equity Capital
Voice in
management
Generally no Yes
Bond Valuation
Claims on Subordinate to
Senior to equity
income & assets debt
Maturity Stated None
Interest No deduction
Tax treatment
deduction

Source: Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 7: Stock Valuation, p. 308. Addison Wesley.
Note: The table was adapted from Principles of managerial finance (10th ed.) (Chapter 7: Stock Valuation) (p. 308) (Table 7.1), by L. J. Gitman, 2003, Boston,
MA. Printed in the United States. Addison Wesley. Copyright 2003 by Lawrence J. Gitman. 5 6

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Bonds Attributes of Bonds

• A BOND is a long-term debt instrument • Claims on assets & income
wherein a borrower will pay its holder • Par value
(investor) a fixed amount of interest • Coupon interest rate The “Big Three” Credit
annually. Rating Agencies:
• Maturity [1] Moody’s Investor
Services (Moody’s)
• Indenture [2] Standard and Poor’s
(S&P)
• Bond ratings [3] Fitch Group (Fitch)

• Current yield
Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation and
Characteristics of Bonds, p. 227. Pearson Prentice Hall.
Source (“Big Three” Credit Rating Agencies): CFI Education Inc. (Copyright 2015 to 2024). Home>Resources>Fixed Income>S&P – Standard and Poor’s.
Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation and
Characteristics of Bonds, p. 224. Pearson Prentice Hall.
7 Retrieved on January 17, 2024, from https://corporatefinanceinstitute.com/resources/fixed-income/sp-standard-poors/ 8

cont. Attributes of Bonds cont. Attributes of Bonds

• Sample Bond Ratings • Current Yield
Rating / Rating Agency Description
Moody’s S&P
• Formula:
Aaa AAA Highest quality
Aa AA High quality
A A Upper-medium grade Annual Interest Payment
Current Yield =
Baa
Ba
BBB
BB
Medium grade
Lower-medium grade
Market Price of the Bond
B B Speculative
Caa, Ca CCC, CC Poor
C D Highly speculative

Source: Mishkin, F. S. & Eakins, S. G. (2018). Financial markets and institutions (9th global edition), Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?, p. 132. Pearson.
Note: The table was adapted from Financial markets and institutions (9th global edition) (Chapter 5: How Do Risk and Term Structure Affect Interest Rates?) (p. Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation and
132) (Table 5.1), by F. S. Mishkin & S. G. Eakins, 2018, Harlow, United Kingdom. Printed in Malaysia. Pearson. Copyright 2018 by Frederic S. Mishkin.
9 Characteristics of Bonds, p. 229. Pearson Prentice Hall. Note: Almonte, C. K. S. (n.d.) modified the format of the formula.
10

cont. Attributes of Bonds: cont. Attributes of Bonds:

Current Yield Current Yield
• Example: • Solution:
What is the current yield of a bond that
has a par value of PHP 1,000 & a coupon PHP 1,000 * 0.07
Current Yield = = 6.83%
interest rate of 7% p.a. given a market PHP 1,025
price of PHP 1,025?

Source: Almonte, C. K. S. (February 7, 2009; updated on January 10, 2024). Solved by: Almonte, C. K. S. (January 10, 2024).
11 12

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Types of Bonds cont. Types of Bonds

As to Issuer Other Characteristics • International Bonds
Government** Debenture
– EUROBONDS are “… denominated in a currency
Corporate* Subordinated Debenture
other than that of the country in which they are
Mortgage Bonds sold.” (p. 654)
Eurobonds
– FOREIGN BONDS are “… sold in a foreign country
Foreign Bonds*
and denominated in that country’s currency.” (p. 655)
Floating-Rate Bonds*
Zero & Very Low Coupon
Bonds
Junk (High-yield) Bonds
Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation and
Characteristics of Bonds, p. 224.
Source (with *): Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 6: Interest Rates and Bond Valuation, pp. 273, 280. Addison Wesley.
13 Source: Mishkin, F. S. & Eakins, S. G. (2018). Financial markets and institutions (9th global edition), Glossary, pp. 654-655. Pearson. 14
Source (with **): Almonte, C. K. S. (February 7, 2009).

Philippine Fixed Income cont. Philippine

Instruments Market Fixed Income Instruments Market
• Issuers are government & corporations • Capital Market Infrastructure: Philippine Dealing System
(PDS) Group
• Dominated by government issues
• Corporate bonds require a relatively large
Philippine Dealing &
minimum investment & somewhat illiquid PDS Holdings Corp. Exchange Corp. (PDEx)

• Trading is scripless
• Local credit rating agency: Philippine Rating Philippine Depository & Trust
Corp. (PDTC)
Services Corporation (PhilRatings)
PDS Academy for Market
Development Corp. (PDSA)

Source: Almonte, C. K. S. (February 26, 2010; updated on January 17, 2024). Source: PDS Group (Copyright 2023). Retrieved on January 10, 2024, from https://www.pds.com.ph/index.html%3Fpage_id=180.html
15 16

cont. Philippine
Fixed Income Instruments Market
Basic Valuation Model
• Examples of Government-issued Fixed Income • Formula:
Instruments in the Philippines
C1 C2 Cn
V= + + ... +
T-bills Zero-coupon Bonds (1 + k )1 (1 + k )2 (1 + k )n
ROPs
FXTNs RTBs

Notes: FXTNs = fixed-rate treasury notes; RTBs = retail treasury bonds; ROPs = Republic of the
Philippines Bonds.

Source: Almonte, C. K. S. (n.d.). Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation and
17 Characteristics of Bonds, p. 234. Pearson Prentice Hall. Note: Almonte, C. K. S. (n.d.) modified the format of the formula.
18

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Bond Valuation cont. Bond Valuation

• Formulae: where:
general formula ⎡ ⎡ ⎤⎤
n
It M ⎢⎛ 1⎞ 1 ⎥⎥
Vb = ∑ t
+ PVIFA = ⎢⎜ ⎟ * ⎢⎢1− n ⎥⎥
t =1 (1 + k b ) (1 + k b )n for coupon ⎢⎣⎝ i⎠
⎢⎣ 1+ i ( ) ⎥⎦⎥⎦
bonds*
1
PVIF =
Vb = [ I * PVIFAkb,n ] + [ M * PVIFkb,n ]
n
(1+ i)
Note: i = kb or kb
Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation
and Characteristics of Bonds, p. 236. Pearson Prentice Hall. Note: Almonte, C. K. S. (n.d.) modified the format of the formula.
Source (PVIFA & PVIF): Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 4: Time Value of Money, pp. 160, 167. Addison Wesley. Note:
Source (with *): Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 6: Interest Rates and Bond Valuation, p. 284. Addison Wesley.
Note: Almonte, C. K. S. (February 7, 2009) modified the formula.
19 Almonte, C. K. S. (n.d.) modified the formulae. 20
Source (note): Almonte, C. K. S. (n.d.).

cont. Bond Valuation cont. Bond Valuation

• Example 1: • Solution:

A firm issued a 5-year bond with a par Vb = [ PHP 100 * PVIFA10%,3 ] + [ PHP 1,000 * PVIF10%,3 ]
= [ PHP 100 * 2.486852 ] + [ PHP 1,000 * 0.7513148 ]
value of PHP 1,000 & a coupon rate of = PHP 248.6852 + PHP 751.3148
10% p.a. If the security has 3 years to Vb = PHP 1,000
maturity, determine the bond value if the
required return is 10% p.a.
Thus, the bond is trading at PAR.

Source: Almonte, C. K. S. (February 7, 2009). Solved by: Almonte, C. K. S. (February 7, 2009; recomputed using algebraic PVIFA & PVIF on January 10, 2024).
21 22

cont. Bond Valuation cont. Bond Valuation

• Example 2: • Solution:

A firm issued a 5-year bond with a par Vb = [ PHP 100 * PVIFA8%,3 ] + [ PHP 1,000 * PVIF8%,3 ]
= [ PHP 100 * 2.577096988 ] + [ PHP 1,000 * 0.793832241 ]
value of PHP 1,000 & a coupon rate of = PHP 257.7096988 + PHP 793.832241
10% p.a. If the security has 3 years to Vb = PHP 1,051.54
maturity, determine the bond value if the
required return is 8% p.a.
Thus, the bond is trading at a PREMIUM.

Source: Almonte, C. K. S. (February 7, 2009). Solved by: Almonte, C. K. S. (February 7, 2009; recomputed using algebraic PVIFA & PVIF on January 10, 2024).
23 24

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cont. Bond Valuation cont. Bond Valuation

• Example 3: • Solution:

A firm issued a 5-year bond with a par Vb = [ PHP 100 * PVIFA12%,3 ] + [ PHP 1,000 * PVIF12%,3 ]
= [ PHP 100 * 2.401831275 ] + [ PHP 1,000 * 0.711780247 ]
value of PHP 1,000 & a coupon rate of = PHP 240.1831275 + PHP 711.780247
10% p.a. If the security has 3 years to Vb = PHP 951.96
maturity, determine the bond value if the
required return is 12% p.a.
Thus, the bond is trading at a DISCOUNT.

Source: Almonte, C. K. S. (February 7, 2009). Solved by: Almonte, C. K. S. (February 7, 2009; recomputed using algebraic PVIFA & PVIF on January 10, 2024).
25 26

Bond Valuation: cont. Bond Valuation:

Interest Is Paid More Than Once A Year Interest Is Paid More Than Once A Year
• Formulae: • Example:
It A corporation issued a 10-year bond with a
n *m
m M
Vb = ∑ t
+ n *m
general formula PHP 5,000 par value & a 10% coupon
t =1 ⎛ kb ⎞ ⎛ kb ⎞
⎜1 + ⎟ ⎜1 + ⎟ interest rate. The security has 7 years to
⎝ m⎠ ⎝ m⎠
maturity. If interest is to be paid semi-
⎡I ⎤ ⎡ ⎤ annually & the required return is 12% p.a.,
for coupon
Vb = ⎢ * PVIFA kb ⎥ + ⎢M * PVIFkb ⎥ bonds* what is the value of the bond?
⎣m m
,n * m
⎦ ⎣ m
,n * m
⎦
Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation
and Characteristics of Bonds, p. 238. Pearson Prentice Hall. Note: Almonte, C. K. S. (n.d.) modified the formula.
Source (with *): Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 6: Interest Rates and Bond Valuation, pp. 291 & 292. Addison Source: Almonte, C. K. S. (February 7, 2009).
Wesley. Note: Almonte, C. K. S. (February 7, 2009) modified the formula.
27 28

cont. Bond Valuation: Expected Rate of Return

Interest Is Paid More Than Once A Year [Yield to Maturity (YTM)]
• Solution: • The EXPECTED RATE OF RETURN
⎡ PHP 5,000 * 0.1 ⎤ ⎡ ⎤ [YIELD TO MATURITY (YTM)] refers to
Vb = ⎢ * PVIFA 12% ⎥ + ⎢PHP 5,000 * PVIF12% ⎥
⎣ 2 2
,7* 2
⎦ ⎣ 2
,7* 2
⎦ “the discount rate that equates the present
value of the future cash flows (interest and
Vb = [ PHP 250 * PVIFA6%,14 ] + [ PHP 5,000 * PVIF6%,14 ]
maturity value) with the current market
= [ PHP 250 * 9.294983933 ] + [ PHP 5,000 * 0.442300964 ]
= PHP 2,323.745983 + PHP 2,211.50482 price of the bond.” (p. 239)
Vb = PHP 4,535.25

Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation
Solved by: Almonte, C. K. S. (February 7, 2009; recomputed using algebraic PVIFA & PVIF on January 10, 2024).
29 and Characteristics of Bonds, p. 239. Pearson Prentice Hall. 30

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cont. Expected Rate of Return cont. Expected Rate of Return

(YTM) (YTM)
• Formula: • Example:
⎡ I M − Vb ⎤ Determine the YTM of a bond that has a
⎢ + ⎥ par value of PHP 1,000, a coupon interest
Approximate YTM = ⎢ m n * m ⎥ * m
M + Vb rate of 10% p.a. (paid semi-annually), a
⎢ ⎥
⎣ 2 ⎦ market price of PHP 1,090, & 5 years to
maturity.

Source (Formula: Approximate YTM): Eakins, S. G. (2003), Study guide to accompany principles of managerial finance (10th edition) by Lawrence J. Gitman, p. Source: Almonte, C. K. S. (January 31, 2011).
6-8. Copyright 2003 Pearson Education, Inc. Addison Wesley. Note: Almonte, C. K. S. (January 31, 2011) modified the formula.
31 32

cont. Expected Rate of Return Bond Valuation:

(YTM) Important Relationships
• Solution: • Relationship 1:
↑ kb , ↓ V b
⎡ PHP 100 PHP 1,000 − PHP 1,090 ⎤
⎢ + ⎥
Approximate YTM = ⎢ 2 5*2
PHP 1,000 + PHP 1,090 ⎥ * 2 = 7.85%
⎢ ⎥
⎣ 2 ⎦

Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation
Solved by: Almonte, C. K. S. (January 31, 2011).
33 and Characteristics of Bonds, pp. 240 & 241. Pearson Prentice Hall. 34

cont. Bond Valuation: cont. Bond Valuation:

Important Relationships Important Relationships
• Relationship 2: • Relationship 3:
Vb = PREMIUM (if kb < coupon int. rate) Vb approaches PAR VALUE as the
Vb = PAR (if kb = coupon int. rate) maturity date nears.
Vb = DISCOUNT (if kb > coupon int. rate)

Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation
and Characteristics of Bonds, pp. 241 & 242. Pearson Prentice Hall. 35 and Characteristics of Bonds, p. 242. Pearson Prentice Hall. 36

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cont. Bond Valuation: cont. Bond Valuation:

Important Relationships Important Relationships
• Relationship 4: • cont. Relationships 3 & 4: Example:
A bond has a par value of PHP 3,000 & has a coupon interest
Bonds with longer terms are riskier rate of 9% p.a.
compared to bonds with shorter maturities. Required:
[1] Vb if the kb is 7% p.a. at 12, 6, & zero years to maturity.
[2] Vb if the kb is 9% p.a. at 12, 6, & zero years to maturity.
[3] Vb if the kb is 11% p.a. at 12, 6, & zero years to maturity.
[4] Changes in Vb when kb shifts from 9% p.a. to 7% p.a.
[5] Changes in Vb when kb shifts from 9% p.a. to 11% p.a.

Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 7: Valuation Source: Almonte, C. K. S. (n.d.; updated on January 12, 2024) adapted Gitman (2003): Gitman, L. J. (2003). Principles of managerial finance (10th ed.),
and Characteristics of Bonds, pp. 242-244. Pearson Prentice Hall. 37 Chapter 6: Interest Rates and Bond Valuation, pp. 286-289. Addison Wesley. 38

cont. Bond Valuation:

Important Relationships
• cont. Relationships 3 & 4: Example:
Years to Maturity
12 6 0
Vb when kb = 7% p.a. (in PHP) 3,476.56 3,285.99 3,000.00 Stock Valuation
Vb when kb = 9% p.a. (in PHP) 3,000.00 3,000.00 3,000.00
Vb when kb = 11% p.a. (in PHP) 2,610.46 2,746.17 3,000.00
Changes in Vb when kb shifts 15.89% 9.53% -
from 9% p.a. to 7% p.a.
Changes in Vb when kb shifts (12.98%) (8.46%) -
from 9% p.a. to 11% p.a.

Solved by: Almonte, C. K. S. (January 12, 2024).

Source (idea): Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 6: Interest Rates and Bond Valuation, pp. 286-289. Addison Wesley.
Note: Almonte, C. K. S. (n.d.; updated on January 12, 2024) partially adapted the table from Principles of managerial finance (10th ed.) (Chapter 6: Interest Rates and
Bond Valuation) (p. 287) (Table 6.6), by L. J. Gitman, 2003, Boston, MA. Printed in the United States. Addison Wesley. Copyright 2003 by Lawrence J. Gitman. 39 40

cont. Overview cont. Overview

• STOCKS represent an ownership interest • A PREFERRED STOCK (PS) has features
in a firm. that are present in bonds & common
stock.
• Types of Stocks
– Preferred Stock (PS)
– Common Stock (CS)

Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 8: Stock Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 8: Stock
Valuation, pp. 256, 261. Pearson Prentice Hall. 41 Valuation, p. 256. Pearson Prentice Hall. 42

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cont. Overview cont. Overview

• cont. PS: • A COMMON STOCK (CS) constitutes
• Characteristics / Types ownership in a firm.
Less Common Common
Adjustable rate PS Multiple classes of PS
Participation Claim on assets & income
Payment-in-kind (PIK) preferred Cumulative dividends
Protective provisions
Convertibility
Retirement features
- Call provision
- Sinking fund provision

Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 8: Stock Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 8: Stock
Valuation, pp. 256-259. Pearson Prentice Hall. 43 Valuation, p. 261. Pearson Prentice Hall. 44

cont. Overview Issuing Common Stock

• cont. CS: Private
Venture Capitalists
(VCs)
• Characteristics Angel Capitalists
– Claim on assets & income (Angels)

– Voting rights Initial Public Offering

Primary Market
– Pre-emptive rights (IPO)
– Limited liability
Rights Offering

Private Placement
Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 8: Stock
Valuation, pp. 261, 263-267. Pearson Prentice Hall. 45 Source: Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 7: Stock Valuation, pp. 314-316. Addison Wesley. 46

Philippine Stock Market cont. Philippine Stock Market

• The PHILIPPINE STOCK EXCHANGE, • Securities Traded:
INC. (PSE) is the Philippines’ sole stock
exchange. Common Stock (CS) Preferred Stock (PS)

Philippine Deposit
Warrants
Receipts (PDRs)

Exchange Traded Fund Dollar Denominated

(ETF)* Securities (DDS)**
Source: The Philippine Stock Exchange, Inc. (PSE). Home>Trading>Investing at PSE. Retrieved on January 10, 2024, from https://www.pse.com.ph/investing-at-pse/
#investing3
Source (with *): The Philippine Stock Exchange, Inc. (PSE). Home>Products & Services>Exchange Traded Fund. Retrieved on January 17, 2024, from https://
www.pse.com.ph/exchange-traded-fund/
Source: The Philippine Stock Exchange, Inc. (PSE). Home>About PSE>Corporate Profile - Our Business. Retrieved on January 10, 2024, from https://
corporate.pse.com.ph/about-pse/corporate-profile/our-business/
47 Source (with **): The Philippine Stock Exchange, Inc. (PSE). Home>Products & Services>Dollar Denominated Securities. Retrieved on January 10, 2024, from 48
https://www.pse.com.ph/dollar-denominated-securities/

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cont. Philippine Stock Market cont. Philippine Stock Market

• Factors of Market Performance • Ways to Profit

Market
Value Turnover Index Level Capital Gains Cash Dividend
Capitalization
Property Dividend*

Stock Rights Stock Dividend

Source: The Philippine Stock Exchange, Inc. (PSE). Home>Trading>Investing at PSE. Retrieved on January 12, 2024, from https://www.pse.com.ph/investing-at-pse/ Source: http://www.pse.com.ph/ retrieved on May 25, 2007.
#investing3 49 Source (with *): Almonte, C. K. S. (August 19, 2015). 50

cont. Philippine Stock Market cont. Philippine Stock Market

• Indices • Kinds of Certificates:

– Scrip Certificate
PSEi All Shares A SCRIP CERTIFICATE is a physical stock certificate.

Sectoral Others

Notes: The PSEi was used to be called PHISIX. Sectoral indices: Financials, Industrial, Holding Firms,
Property, Services, Mining & Oil; Others (other indices): PSEDivY, & PSE MidCap.

Source: The Philippine Stock Exchange, Inc. (PSE). Home>Market Information>Indices Composition. Retrieved on January 10, 2024, from https://www.pse.com.ph/
indices-composition/ 51 Source: http://www.pse.com.ph/ retrieved on June 4, 2007. 52

cont. Philippine Stock Market cont. Philippine Stock Market

• cont. Kinds of Certificates: Sample Scrip (Stock) • cont. Kinds of Certificates:
Certificate:
– Street Certificate

STREET CERTIFICATES are “securities truly

owned by a client but registered in the name
of a nominee broker to facilitate transactions”.

Source of images: Ilano, A. R. (co-editor) & Mariano, R. S. (co-editor); Aragon, B. M.; Cayanan, A. S.; Clemente, L. C.; Echanis, E. S.; Guidote, C. P.;
Jacinto, R. N.; Quiason, E. I.; Rodriguez, R. A.; Sazon, T. D.; Teh, S. T.; Uy-Tioco, G.; & Ybañez, R. C. (1995), Investment management & the Philippine
stock market, pp. 22 & 23. Published by Development Center for Finance; FINEX Research and Development Foundation, Inc.; & Asian Securities Industry
Institute. Philippine Copyright 1995 by Bienvenido M. Aragon, Arthur S. Cayanan, Lilia Calderon Clemente, Erlinda S. Echanis, Corazon P. Guidote, Alberto
R. Ilano, Ricardo N. Jacinto, Roberto S. Mariano, Enrique I. Quiason, Rafael A. Rodriguez, Teodoro D. Sazon, Shirley T. Teh, George Uy-Tioco, Roy C. 53 Source: http://www.pse.com.ph/ retrieved on June 3, 2007. 54
Ybañez.

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cont. Selected
Selected Valuation Models
Valuation Models
• Single Holding Period Model • Single Holding Period Model
• Zero-growth Model*
• Constant-growth (Gordon) Model* Formula:
• Price/Earnings (P/E) Multiple Approach*
D1 P1
Vcs = +
(1 + k cs ) (1 + k cs )

Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 8: Stock
Valuation, pp. 268 & 269. Pearson Prentice Hall.
55
Source (with *): Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 7: Stock Valuation, pp. 325-327, 334. Addison Wesley.
Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 8: Stock
Valuation, pp. 268 & 269. Pearson Prentice Hall. Note: Almonte, C. K. S. (n.d.) modified the format of the formula.
56

cont. Selected cont. Selected

Valuation Models Valuation Models
• cont. Single Holding Period Model: Example: • cont. Single Holding Period Model: Solution:

Next year, a firm is expected to pay dividends of

PHP 1 / share & the stock price is forecasted to
be PHP 85 / share by the end of the year. PHP 1 PHP 85
Vcs = + = PHP 78.18
Assuming a required return of 10% p.a., ( 1 + 0.10 1+ 0.10 ) ( )
determine the current price (per share) of the
security.

Solved by: Almonte, C. K. S. (January 10, 2024).

Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 8: Stock
Valuation, p. 278 (Problem 8-11A.). Pearson Prentice Hall. Note: Almonte, C. K. S. (February 8, 2009; updated on January 10, 2024) modified the problem.
57 58

cont. Selected cont. Selected

Valuation Models Valuation Models
• Zero-growth Model • cont. Zero-growth Model: Example 1:
Formulae: “X” Corporation’s preferred stock pays a
dividend of PHP 15 / share. If the
D D1 investor’s required return is 10% p.a.,
Vps = OR Vcs = what is the value (on a per share basis) of
k ps k cs
the asset?

Source (Vps): Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 8:
Stock Valuation, p. 260. Pearson Prentice Hall. Note: Almonte, C. K. S. (n.d.) modified the format of the formula.
Source: Almonte, C. K. S. (February 8, 2009; updated on January 10, 2024).
Source (Vcs): Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 7: Stock Valuation, p. 325. Addison Wesley. Note: Almonte, C. K. S.
(February 8, 2009) modified the formula.
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cont. Selected cont. Selected

Valuation Models Valuation Models
• cont. Zero-growth Model: Solution: • cont. Zero-growth Model: Example 2:
“Y” Corporation’s preferred stock pays a
dividend of 8% p.a. Its par value is PHP
PHP 15
Vps = = PHP 150 200 / share. If the investor’s required
0.10 return is 10% p.a., compute for the value
(on a per share basis) of the asset.

Solved by: Almonte, C. K. S. (January 10, 2024). Source: Almonte, C. K. S. (February 8, 2009; updated on January 10, 2024).
61 62

cont. Selected cont. Selected

Valuation Models Valuation Models
• cont. Zero-growth Model: Solution: • cont. Zero-growth Model: Example 3:
“Z” Corporation’s common stock pays a
fixed dividend of PHP 2.50 / share. If the
PHP 200 * 0.08
Vps = = PHP 160 investor’s required return is 10% p.a.,
0.10 solve for the value (on a per share basis)
of the asset.

Solved by: Almonte, C. K. S. (January 10, 2024). Source: Almonte, C. K. S. (February 8, 2009; updated on January 10, 2024).
63 64

cont. Selected cont. Selected

Valuation Models Valuation Models
• cont. Zero-growth Model: Solution: • Constant-growth (Gordon) Model
Formula:
PHP 2.50 D1
Vcs = = PHP 25 Vcs =
0.10 k cs − g

Solved by: Almonte, C. K. S. (January 10, 2024).

Source: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.), Chapter 8: Stock
65 Valuation, p. 270. Pearson Prentice Hall. Note: Almonte, C. K. S. (n.d.) modified the format of the formula.
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cont. Selected cont. Selected

Valuation Models Valuation Models
• cont. Constant-growth (Gordon) Model: • cont. Constant-growth (Gordon) Model:
Example: Solution:

A corporation is expected to pay a dividend of

PHP 3.75 / share next year. If the required
PHP 3.75
return is 11% p.a. & the projected growth rate is Vcs = = PHP 62.50
0.11− 0.05
5% p.a., find the value (on a per share basis) of
the asset.

Source: Almonte, C. K. S. (February 8, 2009; updated on January 10, 2024). Solved by: Almonte, C. K. S. (January 10, 2024).
67 68

cont. Selected cont. Selected

Valuation Models Valuation Models
• P/E Multiple Approach • cont. P/E Multiple Approach: Example:
Formula: A corporation projects that its EPS would
be PHP 4.75. If the average P/E ratio of
Vcs = Expected EPSfirm * P/E Ratioindustry the industry is 15, determine the value (on
a per share basis) of the asset.

Source: Gitman, L. J. (2003). Principles of managerial finance (10th ed.), Chapter 7: Stock Valuation, p. 334. Addison Wesley. Note: Almonte, C. K. S. (n.d.) Source: Almonte, C. K. S. (February 8, 2009; updated on January 10, 2024).
expressed the formula in equation form. 69 70

cont. Selected
Valuation Models
• cont. P/E Multiple Approach: Solution:

Vcs = PHP 4.75 * 15 = PHP 71.25

Solved by: Almonte, C. K. S. (January 10, 2024).

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