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VALUATION OF SECURITIES

Time value of money has many applications. It


provides compounding techniques are used to
give the present and future values. They can also
be used to calculate the value of securities and
the returns by discounting them at an appropriate
discounting rate. As the value of a financial asset
is the sum of future cash flows, which are
discounted over specific period of time by using a
discount rate.
The valuation of financial asset includes the
valuation of preference shares, equity shares,
bonds and debentures.
Key inputs for valuation
CASH FLOWS
TIME PERIOD
DISCOUNT RATE or REQUIRED RATE OF RETURN
(K= Risk free rate + Risk premium)

CONCEPTS IN VALUATION
BOOK VALUE
MARKET VALUE
GOING CONCERN VALUE
LIQUIDATING VALUE
CAPITALIZED VALUE
BOND VALUATION FEATURES
PAR VALUE
COUPON INTEREST RATE
MATURITY
ANNUAL INTEREST
B0= I(PVAFni)+RV(PVFni)
Where Bo is bond value
I=Interest
PVAFni = Present value annuity factor for number of
years and interest rate
RV =Redemption value
PVF = Present value factor at rate of interest and
number of years
VALUATION OF PREFERENCE SHARES
They are a mixture of debentures and equity because
they receive fixed returns but receive dividends like
equity. They can be redeemable and irredeemable.
But they are not as popular as equity shares because
of the capital appreciation which is lower in
preference shares.

Po= D(PVAFni)+RV(PVFni)
Po=Value of preference share
D=Dividend
PVAFni= Present value Annuity factor at rate of
interest and number of years
PVF= Present value factor at rate of interest and
VALUATION OF EQUITY SHARES
Equity shareholders are the owners of the business.
The financial manager has to maximise the wealth of
the equity shareholders because they repressent the
real ownership interest of a company. The companys
image is formed with the value of the equity share in
the market. Equity shares are traded in stock
markets and are very popular. They receive returns
after the paying returns to the debt and preference
shareholders and same is when the company goes
into liquidation. Some years they might receive high
returns if the company earns high profits while some
times they might receive no dividends in times of
high losses to the company.
VALUATION OF EQUITY SHARES BASED ON
ACCOUNTING EQUATION
Book value: Value ascertained form the balance
sheet. Which can be calculated as: Net worth/ no.of
shares
Liquidation value : Value realised after liquidating
the assets and making a payment to creditors and
preference shareholders. This value is more realistic
as it tells the current value of share but does not tell
the earning capacity of the share.
VALUATION OF EQUITY SHARES BASED ON
DIVIDENDS
Constant or zero growth in dividends
Po=D/Ke
Po= Value of equity share
D= Annual dividend
Ke= Required rate of return
Constant growth in dividends
Po= D1/ke-g
Ke= required rate of return
D1= Dividends in one year
G= growth rate
VALUATION OF EQUITY SHARES BASED ON EARNINGS
EPS= (PAT-Preference div)/No. of equity shares
Value= EPS x P/E ratio