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

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 Gordons 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, 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, 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.

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.

Duration of Bond
Seven golden rules for duration of bonds
1. The duration of a zero-coupon bond is time to maturity. 2. Holding maturity constant, a bonds duration is higher when the coupon is lower. 3. Holding the coupon rate constant, a bonds duration generally increases with its time to maturity. Duration always increases with maturity for bonds sealing at par or at premium. 4. Holding other factors constant, the duration of a coupon bond is higher when the bonds yield to maturity is lower. 5. The duration of a level perpetuity is (1+y)/y. here duration and maturity can differ substatntially. 6. The duration for a level annuity is equal to the following :

7. The duration of a coupon bond equals the following: