4/11/2012

Why And What Is Necessary

Concepts of Valuation
•Book Value

•Objective is finding out the Intrinsic Value

•Market value •Going concern value •Liquidation value •Capitalized value

•To take right investment decision

Basic Valuation Model

VALUATION OF PREFERANCE SHARES
Redeemable preference share

VALUATION OF PREFERANCE SHARES
Irredeemable preference share

Where, Vj = the value of stock j D0 = the dividend payment in the current period g = the constant growth rate of dividends k = the required rate of return on stock j n = the number of periods, which we assume to be infinite

Where, P0 = value of preference share Dt = annual fixed dividend MV = redemption value of preference share n = life of the preference share kp = required rate of return of the preference shareholders

Where, P0 = value of the irredeemable preference share D = fixed annual dividend kp = required rate of return of preference shareholders

VALUATION OF EQUITY SHARES
Valuation Based On Dividends

VALUATION OF EQUITY SHARES
Valuation Based On Dividends (Cont.)

VALUATION OF EQUITY SHARES
Valuation Based On Dividends
Zero Growth In Dividend Or Constant Dividends

Where, Po = value of the equity share Dt = Dt-1, expected dividend over the year ke = required rate of return of the equity investors

Zero Growth In Dividend Or Constant Dividends Constant Growth In Dividend Variable Growth In Dividends

Where P0 = value of equity share D1 = annual constant dividend ke = required rate of return of equity investor

1

5. a bond’s duration generally increases with its time to maturity. The duration of a coupon bond equals the following: 2 . expected dividend in period t Dn= expected dividend in period n ke = required rate of return of the equity investors g= the constant growth rate of dividends n= the number of periods of variable growth Where P0 = price of a share D1= EPS at the end of year 1 ke= required rate of return of the equity investors g = rate of return on reinvestments VALUATION OF EQUITY SHARES VALUATION BASED ON EARNINGS Price earnings ratio Value = EPS * P/E ratio. the duration of a coupon bond is higher when the bond’s yield to maturity is lower. Duration always increases with maturity for bonds sealing at par or at premium. Holding the coupon rate constant. 6. Holding maturity constant. The duration of a level perpetuity is (1+y)/y. Duration of Bond Seven golden rules for duration of bonds 1. and VALUATION OF RIGHT BOND VALUATION Where P= Market price per share e= Earnings per share D = Dividend per share k= Cost of Capital (Capitalization rate) g = Growth rate of Dividends Where Vr = value of right MPcr = cumright market price OP = offer price N0 = existing number of shares N1 = number of new share offered. a bond’s duration is higher when the coupon is lower. here duration and maturity can differ substatntially. The duration for a level annuity is equal to the following : 7. The duration of a zero-coupon bond is time to maturity. 2. P0 = value of bond at present It = Annual interest payment starting one year from now till the end of the year n MV = redemption repayment at the end of the year n/ Maturity Value of the bond N= Number of years to Maturity K = appropriate discount rate. 4. Holding other factors constant.4/11/2012 VALUATION OF EQUITY SHARES Valuation Based On Dividends Constant growth in dividends VALUATION OF EQUITY SHARES Valuation Based On Dividends Variable growth in dividends VALUATION OF EQUITY SHARES VALUATION BASED ON EARNINGS The Gordon’s Model Where P0 = value of equity share D1 = expected dividends at the end of year 1 ke = required rate of return of equity investor g= the projected growth rate Where Po = value of the equity share Dt = Dt-1. 3.

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