VALUATION OF SHARES

The ordinary/equity shareholders buy/hold shares in expectation of periodic cash dividends and an increasing share value. They would buy a share when it is undervalued (that is its true value is more than its market price). They sell it when its market price is more than its true value ( it overvalued). The value of a share is equal to the present value of all future dividends I is expected to provide over an infinite time horizon.

VALUATION OF SHARES
Symbolically, P=D1/(1+ke) ^1 + D2/(1+ke) ^2 ++ D ^ infinite/(1+ke) ^ infinite P=Value of shares Dt= per share dividend expected at he end of year, t Ke = required rate of return on share

VALUATION OF SHARES
The equation is designed to compute the value of shares with reference to the expected growth pattern of future dividends and the appropriate discount rate. The computation of value of share can be determined by Zero growth rate. Constant growth rate and Variable growth rate

VALUATION OF SHARES
ZERO GROWTH RATE This approach to dividend valuation assumes a constant no-growing dividend stream. With zero growth in dividends, the value of share would equal the present value of a perpetuity of dividends (Dt) discounted at Ke; P= D1 X 1/Ke = D1/Ke

VALUATION OF SHARES
Example: The per share dividend of premier Instruments Ltd remains constant indefinitely at Rs 10. Assuming a required rate of return of 16%, compute the value of the share. P=D1/Ke = Rs 10/16% = 62.50

VALUATION OF SHARES
CONSTANT GROWTH MODEL According to this approach, dividends are assumed to grow at a constant rate which is less than the required return. This model is primarily known as Gordon Model. The value of a share is given by below mentioned equation: P= Do X (1+g) ^1 + Do X (1+g) ^2 ++Do X (1+g) ^infinite P=D1/ Ke-g P= value of share Ke= required rate of return g = growth rate in dividend

VALUATION OF SHARES
The below mentioned company had paid the following dividends per share Year Dividend per share 1 2.00 2 2.10 3 2.24 4 2.40 5 2.58 6 2.80 Assuming a 16% required rate of return and Rs 3 per share in the year 7th compute the value of share of this company.

VALUATION OF SHARES
Solution; P=D1 / Ke-g The expected constant of dividend growth, g, would b equal to the annual growth rate of dividends g = D6=D1 X (1+g)^5 D1 / D6 = 1 /(1+g)^5 = PVIF g, 5 PVIF = Rs 2/Rs 2.8 = 0.714

VALUATION OF SHARES
No. of years of growth is year 6-year 1 =5 The PVIF closest to 0.714 is 0.713 (at 7%). Therefore g = 7% P=Rs 3 / (0.16 0.07) = Rs 3 / 0.09 = Rs 33.3 per share