It requires estimates of:

1) The stream of expected returns

2) The required return of return on the investment
 Valuation of bonds.
 Valuation of preferred stock.
Calculating the value of bonds is easy
because the size and time pattern of
cash flows from the bonds over its life
are known. A bond promises the
following.
 Interest payments semi annually
 Payment of principal on the bond’s
maturity date.
Preferred stock is a perpetuity because it has no
maturity. The owner of preferred stock receives a
promise that it will pay a stated dividend, usually
each quarter , for an infinite period.
 Value of Preferred stock is found as :

Vp = DP/Kp
 The greatet the preffer dividend the greater the
value of share of preffer stock.
 The greater the required rate of return , the lower
the value of preffer stock.
 The discounted cash flow valuation
techniques
The value of stock is estimated based upon
the PV of cash flows.
 The relative valuation technique.
The value of stock is estimated bsed upon its
current price.
There are two approaches .
 Discounted cash flows techniques.
 Relative valuation techniques.
It includes
 Present value of dividends.
 Pv of operating free cash flow
 Pv of free cash flow to equity.
 Price earning ratio (P/E)
 Price cash flow ratio (P/CF)
 Price book value ratio (p/BV)
 Price sales ratio (p/s)
 Quantitative
All the numerical factors of company such as assets,
liabilities and cash flows, P/E ratio.

 Qualitative
These are important part of a company such
who are the top management what are the business
strategies.
 Factors
Share value
 Competitive Edge
Historic price of share
 Earnings
P/E Ratio
 Capital Structure
Economic Condition
 Management
Stock Market Condition
 Financial Performance

Determine Future Value

Determine Present Value
Its allow to determine the value of an investment by company it similar
entities.

1. The price/cash flow ratio

Normal investor not used this ratio as

compared to professional investors when they analysis in depth when
used it. The profit are manipulates depreciation and amortization when
we depreciate any asset then cash out flow is not take place in
company.

 The expected growth rate of cash flow.
 Risk of stock as indicated by the uncertainty of
cash flow.
 Also affecting by the capital structure.
If company earning low suddenly or going into negative but in future its
outlook good so in this condition we used price to book ratio to find a
share price.

When we sale all the assets of company and pay all the liabilities then
remaining cash is called book value.

These factors that influence an equity investors
required rate of return.
1. Economy real risk free rate

2. The expected rate of inflation ( I )

3. A risk premium ( RP )

Absolute minimum rate that an investor should

required. It depend on the real growth rate of the
investors home economy b/w capital investor grow
at least as fast as economy.
 Foreign Real RFR
◦ Should be determined by the real growth rate
within the particular economy
◦ Can vary substantially among countries
 Inflation Rate
◦ Estimate the expected rate of inflation and adjust
the NRFR for this expectation
NRFR=(1+Real growth)×(1+Expected
inflation)-1
 Must be derived from each investment
in each Country
 The five risk components vary
between countries
◦ Business risk
◦ Financial risk
◦ Liquidity risk
◦ Exchange rate risk
◦ Country risk
 Determined by
◦ The growth of earnings
◦ The proportion of earning paid in dividend
 In the short run, dividends can grow at a
differnet rate than earnings due to changes
in the payout ratio
 Earnings growth is also affected by
compounding of earnings retention
g=(Retention rate)×(return on Equity)
RR×ROE
ROE= net income/sales× sales/total
assets× total assets/common equity

= profit/margin× total assets turnover×

financial leverage
Differences in accounting pratices affect the components of ROE
 Retention Rate
 Net Profit Margin
 Total Asset Turnover
 Total Assets/Equity Ratio