VALUATION OF SECURITIES

•Concept of valuation
•Bond valuation

•Equity valuation

•Dividend capitalization approach and

ratio approach
•Valuation of warrants an convertibles
 CONCEPT OF VALUATION
 Valuation is the process of determining the worth of an asset.
 Process of estimating the value of the financial assets ( bonds, preference
shares and equity shares ,etc.) is called valuation for the purpose of this
chapter.
 Every investor and finance manager must understand how to value
financial assets to judge whether these are a good buy or not.
 Different concepts of valuation have specific uses and purposes and
therefore the same assets may be valued differently by different person
with different perspective.
 Some of these valuation concepts are as follows:
1. Book Value (BV): the BV of an asset is an accounting concept based on
historical data given in the balance sheet of the firm. The BV of an assets
may either be given in the balance sheet or can be ascertained on the
basis of the figures contained in the balance sheet. Ex: The BV of a
debenture is the face value itself and is stated in the balance sheet. The
BV of an equity share can be ascertained by dividing the net worth of the
firm by the no. of equity shares.
2. Market Value(MV) : is defined as the price for which the asset can be sold.
The MV of a financial asset refers to the price prevailing at the stock
exchange. Incase a security is not listed, then the MV is not available . The
MV of physical assets such as plant or furniture etc. may be difficult to be
ascertained, unless the owner is ready to dispose it off.

3. Going Concern Value (GV): refers to the value of the business as an

operating performing and running business unit. This is the value which a
prospective buyer of a business may be ready to pay. The GV is not
necessarily the MV/BV of all assets taken together. GV maybe less than or
more than the MV/BV of the total business. Rather, GV depends upon the
ability to generate sales and profits in future. If the GV is higher than the
MV , then the difference between the two represents the synergies of the
combined assets.

4. Liquidating value (LV): the LV refers to the net difference between the
realizable value of all the assets and the sum total of external liabilities.
This net difference belongs to the owners/ shareholders and is known as the
LV. The LV is a factor of realizable value of asset and therefore is uncertain.
The LV maybe zero also and in such a case the owners/ shareholders are not
getting anything is the firm is dissolved.
5. Capitalized Value (CV): is defined as the sum of present value of cash
flows from an asset discounted at the required rate of return. In other words
to find out the CV, the future expected benefits are discounted for time value
of money. In the valuation of financial assets, the CV is the most relevant
concept of valuation.
• Bond Valuation: a bond or a debenture is a debt security issued by
the borrower and subscribed/ purchased by a lender/ investor. Bond is a
usual form of long term financing used by firms which upon issuing a
bond, promise to certain cash flows in future ( in the form of interest and/
or repayment) under clearly defined terms and conditions.
• Terminology:
o Par Value: is the value stated on the face of the bond. It represents the
amount the firm borrows and promises to repay at the time of maturity.
Usually the par value or the face value of bonds issued by business firms is
Rs.100 , sometimes its Rs.1000.
o Coupon rate and interest: a bond carries a specific interest rate which is
called the coupon rate. The interest payable to the bond holder is : par
value of the bond * coupon rate. Most bonds pay interest semi-annually .
Ex: a govt. security which has a par value of Rs. 1,000 and a coupon rate of
11 % pays an interest of Rs. 55 every six months.
o Maturity period: refers to the period from the date of issue, after the expiry
of which the redemption repayment will be made to the investor by the
borrower firm. Generally bonds have a maturity period of 1-15 years,
sometimes they have longer maturity.
 Valuation Model: the process of valuation of a bond is relatively simple
because most of the related cash flows are (i) in the annuity form (i.e.
interest) and (ii) are known with certainty. This means that the holder of
the bonds ( present as well as potential ) know the amount and timings of
cash flows expected to generate out of the bond.
 The value of a bond maybe defined as the sum of the present values of the
future interest payments plus present value of the redemption
repayment. The appropriate discount rate to find out the present value
would be required rate of return kd, which depends upon the prevailing
risk free interest rate and risk premium.

n
B0 = ∑ Ii + RV ……(equation1)
i=1 n
(1+kd)i (1+kd)
Where:
B0= a value of bond at present
Ii= annual interest payment starting one year from now till the end of year n,
RV= redemption payment at the end of year n
Kd= appropriate discount rate
 Since the stream of coupon payments is an ordinary annuity, formula of
present value of an ordinary annuity can be used. Hence the value of the
bond is given by the formula:

Bo = I(PVAFi,n)+ RV (PVFi,n)
Where (PVAFi,n) = present value annuity factor at the rate of interest I, and
no. of years , n.
(PVFi,n) = present value factor for a given rate of interest I, and no. of years,
n.

 Bond values with semi- annual interest rate: most of the bonds pay
interest semi- annually. To value such bonds , equation 1 needs to be
modified.
a) Find out half yearly amount of interest by dividing the annual interest by
2.
b) The no. of years to maturity is multiplied by two to get the no. of half
year periods till maturity
c) The required rate of return is also converted to the half year required
rate of return by dividing by 2..
 After incorporating the changes equation 1 can be written as:

2n
B0 = ∑ I/2 + RV
i=1 i 2n
(1+kd/2) (1+kd/2)

Question1 : A bond of Rs.1,000 bearing a coupon rate of 12% is redeemable

at par in 10 years. Find out the value of the bond if
i. Required rate of return is 12%, or 10% or 14%
ii. Required rate of return is 14 % and the maturity period is 8 years or 12
years.
iii. Required rate of return is 12% and redeemable at Rs. 950 or at Rs. 1,050
after 10 years.

Question 2: a bond of Rs.1,000 bearing a coupon rate of 12 % p.a. payable

half yearly is redeemable after 5 years at par. Find out the value of the
bond given that the required rate of return is 14%.
 Yield to maturity: cash flows in relation to a bond are consisting of
regular interest payments and the redemption repayment. The rate of
return, kd, which makes the discounted values of these cash flows equal to
the bond’s market value, is known as the YTM of the bond. So, a bond’s
YTM maybe defined as the internal Rate Of Return (IRR) for a given level
of risk. When an investor evaluates bonds in order to make a buy or not to
buy decision, the evaluation is often done by finding out the IRR of the
bond. IRR of the bond is nothing but the value of kd in equation 1. The
YTM i.e. the IRR of a bond maybe found by solving equation 1 for the
value of kd, given the value of B0, the annual interest, I, the redemption
value, RV and time to maturity, n. Thus, the rate of return expected from
a bond if it is kept till maturity is called YTM of the bond.
 While finding out the YTM, an implied assumption is that all interest
received are reinvested at a rate of return equal to bond’s YTM. In order to
find out the YTM of a bond, equation 1 is to be solved for various values of
kd until the rate causing the calculated bond value equal to its current
value.
 Question 3: a bond of Rs.10,000 bearing coupon rate 12% and
redeemable in 8 years at par is being traded at Rs.10,600. find out the
YTM of the bond.

 Valuation of Convertible debentures: a convertible debenture is a

debenture whose face value is fully or partially converted into equity
shares. The conversion (fully or partially) maybe made compulsory or at
the option of the debenture holders
 Valuation of compulsorily convertible debenture (CCD): in case of a
CCD, the debenture holder gets interest at a specified rate for a
specified period after which a part or full value of the CCD is converted
into specific number of equity shares. In case of partial conversion, the
residual portion continues to earn interest for the remaining period
after which it is redeemed. The cash flows involved in the case of
valuation of CCD are:
a) Periodic interest receivable from a company
b) Expected market price of the share received on conversion
c) Redemption amount, if any:
 n
 B0 (CCD) = ∑ Ii + mPt + RV ……(equation 2)
i=1 (1+kd)i (1+ke)t (1+kd)i

 Where B0 (CCD) = value of CCD

I = interest amount receivable per year
ke = required rate of return on equity component
m = number of share received on conversion
Pt = share price at the conversion time
RV = redemption value if any
n = life of the debentures
kd = rate of discount

 In case of partially convertible debentures, the annual interest before

conversion and after conversion would be different. In case of fully
convertible debentures, there will not be any RV
 Valuation of Optionally Convertible Debentures (OCD): In case of OCD,
the debentures may or may not opt for conversion. He will opt for
conversion only when the only when the value of the debenture after
conversion is more than the value before conversion. So, he will have
options as follows:
a) To continue as a debenture holder: in case the value of the debenture is
the straight debenture value calculated by (equation 1.)
b) To opt for conversion: in case the debenture holder decides to convert
the debentures in equity shares, then the OCD becomes a CCD and its
value may be ascertained as per (equation 2).

 Values in (a) and (b) above, are to be calculated at the time of

conversion option only.
 B0 = [ straight debenture of value as CCD, whichever is higher] +value
of the option.
 Valuation of Deep Discount Bonds: These DDB have an issue price and
a par value or a face value which is payable to the holder on the
maturity of DDB.
 The valuation of DDB can be made can be made on the same lines as the
ordinary bonds are valued.
 B0 (DDB) = FV
n
(1+r)
where B0 (DDB) = value of the DDB
FV = face value of DDB payable at maturity
r = the required rate of return
n = life of the DDB.
Ex: a DDB is issued for a maturity period of ten years and having a par
value of Rs.25,000. Find out the value of the DDB given that the
required rate of return is 15%

B0 (DDB) = Rs.25,000
(1+.15) 10
= Rs. 6,175
 Valuation of Preference Shares: Preference share is a share
which entitles the shareholder to receive (i) a dividend at a fixed rate for
a given period and (ii) a redemption amount at the time of redemption of
preference share (incase of redeemable preference share) OR a dividend
at a fixed rate perpetually till the liquidation of the company ( in case of
irredeemable preference shares).

 If we assume that the preference stock pays fixed annual dividends

during its life and the principal amount on maturity, its value is given
by: n
P0 = ∑ D +M
t=1 t n
(1+rp) (1+rp)
Where P0= current price of the preference stock, D is the annual dividend,
n is the residual life of the preference stock, rp is the required rate of
return on the preference stock, and M is the maturity value.
 Since the stream of dividends is an ordinary annuity, formula for
present value of an ordinary annuity. Hence the value of preference
stock is: P0= D*PVIFArpm+ M*PVIFrpn
 Ex: consider an 8 year, 10 % preference stock with a par value of
Rs.1,000. the required rate of return on this preference stock is 9
percent.
 The value of this preference stock is :
P= 100 * PVIFA 9%,8 years+1,000*PVIF 9%, 8 years
= Rs.1055.5
 the value of irredeemable preference share maybe defined as the
present value of the perpetuity of fixed dividends on preference shares.
Symbolically its given as: P0 = D
kp
 QUESTIONS:
1. A Rs. 1,000 bond matures in 20 years and offers a 9% coupon rate.
The required rate of return is 11%. Compute bond’s value
2. Rs.5,000 bond with a 10% coupon rate matures in 8 years and
currently sells at 97%. Is this bond a desirable investments for an
investor whose required rate of return is 11%.
3. The E Co. is contemplating a debenture issue on the following terms:
face value: Rs.100 per debenture
term to maturity: 7 years
coupon rate of interest:
year 1-2 =8% p.a
3-4 = 12% p.a
5-7 = 15% p.a
The current market rate of interest on similar debentures is 15% p.a.
The co. proposes to price the issue so as to yield a (compounded)
return of 16% p.a. to the investors. Determine the issue price.
Assume the redemption on debenture at a premium of 5%.
4. A bond whose par value is Rs.1,000 bears a coupon rate of 12% and
has a maturity period of 3 years. The required rate of return on the
bond is 10%. What is the value of this bond?
5. Consider the case where an investor purchases a bond whose face
value is Rs.1,000, maturity period is 5 years and nominal ( coupon)
rate is 7%. The required return is 8%. What should he be willing to
pay now to purchase the bond if it matures at par?
6. A bond of Rs.1,000 value carries a coupon rate of 10% and maturity
period of 6 years. Interest is payable semi-annually. If the required
rate of return is 12%. Calculate the value of the bond
7. The bond of Zeta Industries Ltd. With a par value of Rs.500 is
currently traded at Rs.435. The coupon rate 12% and it has a maturity
period of 7years. What is the yield to maturity.
8. Consider a bond of Kenstar Intermediaries Ltd. With the following
features: Par value :Rs.100; Coupon rate:12%; years to maturity:5
years. Find out the value of KenStar’s bond if the required rate of
return is 12%.
9. A financial institution issues two types of bonds with one and three
year’s maturity respectively. The first which pays Rs.10,000 a year
hence, is now selling for Rs.8,929. the second which pays Rs.100 next
year, Rs.100 after 2 years and Rs.1,100 at the end of third year is now
offered at Rs.997.18. What are the implied interest rate of the two
bonds ?
10. A bond with face value of Rs.100 provides 12% annual return and pays
Rs.105 a the time of maturity, which is 10 years from now. If the
investor’s required rate of return is 13%, at what price should the
company issue the bond?
11. A company is offering a bond with the issue price Rs.100, coupon rate
12% with maturity period 5 years. If the bond is to be redeemed at par
and the investor faces a 30% tax on income and a 10% capital gains tax,
what is the effective yield to maturity for the investor?
12. An AAA rated bond of face value Rs.1,000 is currently quoting in the
market at Rs.1,062. the coupon rate of the bond is 14% payable semi-
annually. The remaining maturity of the bond is 5 years and the
principal is repayable at two equal installments at the end of the 4th and
the 5th year from now. Calculate the YTM of the bond.
 Valuation of equity shares based on Dividends:
An investor buys an equity share in expectation of (i) a stream of future
dividends from the company, and (ii) resale price of the equity share after
some time when he is no longer interested in holding the share. The
owner of the share receives dividends as a compensation for investing in
the firm. So, as long as the firm is operating profitably and the investor
holds the shares, he would be expecting to receive a dividend from the
company.
 Assumptions: valuation of equity shares based on dividends requires the
following assumptions:
1. The dividends are payable annually.
2. The first dividend is received after one year from the date of acquisition/
purchase.
3. Sale of equity share if any, occurs only at the end of a year and the ex-
dividend terms.
 The value of an equity share applying the basic valuation model can be
defined as equal to the present value of all future benefits which the
share is expected to provide in the form of dividends over an infinite
period. The future selling price and the capital gain/loss if any, is
ignored. This is so because…what is sold is the right to all
future/subsequent dividends. So from the valuation point of view only the
infinite stream of dividends is relevant.
 Thus the value of equity share is the sum of the present values of future
cash flows (in the form of dividends) discounted at the required rate of
return of the investors.
 Equation: P0 = D1 + D2…….. D∞ …….(equation 3)
1 2 ∞
(1+ke) (1+ke) (1+ke)
Where P0 = value of equity share
Di= expected dividends over the years
ke= required rate of return of equity investors.
 The dividend stream is discounted by the rate of return that can be
earned in the capital market on other securities of comparable risk.
 The total value of firm’s equity shares must be equal to the discounted
value of future dividends paid by the firm. The mentioned model includes
only those dividends which will be paid on the existing shares. If the firm
decides to issue additional equity shares at any time in the future, then
these new shares will also be entitled to subsequent dividend stream. So,
the value of the firm’s equity share is equal to the discounted value of that
portion of total dividends stream which will be paid on the equity shares
outstanding.
 The uncertainty regarding the pattern of dividends is what makes the
valuation of shares a typical job. Three types of dividend patterns can be
assumed and valuation of equity shares under all these three types of
patterns can be ascertained. These three assumptions of dividend patterns
are:
1. Zero growth in dividends or constant dividends
2. Constant growth in dividends, and
3. Variable growth in dividends
 Zero growth in dividends or constant dividends: the dividend
amount remains constant over years. The dividend stream therefore, is a
long term annuity, or almost a perpetuity.
D1 = D2 = D3 = D4…….= D∞
 the value of equity shares under constant dividends assumption is
ascertained by dividing yearly dividend by the required rate of return of
the equity investor.
P0 = D
ke
where P0= value of equity share
D= annual dividend
ke= required rate of return of equity shareholders.
 Example: a firm pays a dividend of 20% on equity shares of face value of
Rs.100 each. Find out the value of the equity share given that the
dividend rate is expected to remain same and the required rate of return
of the investor is 15%.
 Solution: P0 = 20 = Rs.133.33
.15
 Constant growth in dividends: the dividends will grow constantly at
a rate, g, every year. If a firm pays a dividend
2 of D0 at present then the
dividend at the end of year 1 will be D1 i.e. D0(1+g) and the dividend at
the end of year 2 will be D2 = D0 (1+g)2 and so on. Therefore, dividend
payable in any future year can be ascertained with the help of the
following:
t
Dt = D0 (1+g)
or Dt = Dt-1 (1+g)
 The valuation model under constant growth rate, g, can be stated under
the following assumptions.
1. The growth rate, g, is constant and compounding annually.
2. The growth rate, g, is less than the required rate of return of the equity
shareholders
3. The growth rate, g, is subjective estimate of the investor.
 The valuation of equity share under constant growth model can be
ascertained with:
P0 = D0(1+g)1 + D0(1+g) …………..D0(1+g)∞ ……(equation 4)
2

(1+ke) 1 (1+ke)2 (1+ke)∞

 ∞ i
 Equation: P0 = ∑ D0(1+g)
i=1 i
(1+ke)
 Equation 4 indicates an infinite summation. As ke>g the equation 4 can
be transformed into:
P0 = D(1+g)
ke-g
and since D1 =D0 (1+g), therefore
P0 = D1 ………………(equation 5)
ke-g

 Equation 5 explains the current price P0, in terms of expected dividend

at the end of year 1,D1, the projected growth rate, g, and the expected
rate of return of the investors, ke . Alternatively equation 5 can be used
to find out an estimate of ke from the given D1,P0 and g as follows:
ke = (D1/P0) + g

 So ke which is also called the market capitalization rate is equal to the

dividend yield plus the expected growth rate in dividends.
 Variable growth in dividends: the zero growth rate and the constant
growth rate assumptions of dividend patterns are extreme assumptions. In
practical situations, the dividend from a company may show one growth
rate for few years followed by another growth rate for next few years and
then yet another growth rate for next few years and so on. For ex: for 5
years the growth rate in dividends may be 2%, then it may be 3 % for next
5 years and then it may stick to 4% growth rate infinitely. This means that
the dividend will grow at 2% annually for years 1 to 5, at 3% annually for
years 6 to 10 and at 4% annually from year 11 onwards.
n
i 10 ∞ i-5 i-10
P0 = ∑ D0(1+g1) + ∑ D5(1+g2) + ∑ D10(1+g3) ……………(equation 6)
i=1 i=6 i=11
(1+ke)i (1+ke)i (1+ke) i

where P0 = value of equity share

g1,g2,and g3 = different growth rates for different periods, and
ke = required rate of return for equity shareholders
 To find out the value of equity shares under varying growth rates as per
equation 6, the following procedure maybe adopted:
1. Find out the value of cash dividend at the end of each year during the
period over which the growth rate is changing. In the above example,
the growth rate is changing over 10 years (2% growth rate for first five
years and 3% growth rate for next five years).
2. Find out the present values of these cash dividends for different years
by discounting at the required rate of return ke. For this purpose, the
cash dividend is to be multiplied by the respective discounting factor to
find out the present value. Add up all these present values.
3. Find out the value of the equity share at the end of the last year of the
varying growth period i.e. the 10th year as follows:
P10 = D11
ke-g3

 This value P10 represents the present value of all expected dividends
from year 10 onwards at a constant growth rate in dividends, g3. Find
out the present value of this figure by discounting to period 0.
 Valuation of the share currently not paying Dividends: there
maybe numerous cases where the firm is not able to pay any dividend on
equity shares because of insufficient profits during early years or gestation
period or otherwise. Some of the firms may not like to pay early dividends
because they require funds for growth purposes. The dividend discount
model can take care of this type of situations also. Ex: a firm not expected
to pay any dividend for the first 3 years but thereafter will be paying a
dividend of Rs.2 growing at 10% p.a. forever. The value of the share, given
the required rate of return 15% can be calculated as:
As per the constant growth model, the value of the share at
the end of year 3 will be:
P3 = D4
ke-g
= 2 = Rs.40
.15-.10
Now this is the value of the share at the end of year 3. This value should
now be discounted at 15% to find the present value.
P0 = P3 * (PVIF 15%,3 )
= Rs.40 * (.658) =Rs.26.32
Hence the value of the share is Rs.26.32
 Valuation of shares based on Earnings:
Price Earnings Ratio (P/E ratio): is the ratio between the price of a
share and it’s EPS. Ex: if a share whose EPS is Rs.10 is having a
market price of Rs.250, then its P/E ratio is 250/10 = RS. 25. It
means that the market price of the share is 25 times that of the
EPS. As per the P/E ratio approach, the value of the share is:
Value = EPS* P/E ratio

 Risk- Return dimension, share valuation and financial

decision making:
Change in Risk: investment in equity shares is a risky
preposition as the return from the firm in the form of dividends may
vary from one year to another. Also that some shares are more risky
than others. The investors will not commit funds to equity shares
unless the expected rate of return is commensurate with the risk.
The risk associated a share is incorporated in the valuation process
through the adjustment in the required rate of return as follows:
ke = If +rp (general model)
or ke = If + β (km –If) ( CAPM model)
 In both the models, the risk free rate If and the market rate of return km
are held constant, and therefore ke depends upon the rp (the risk
premium) or β (the beta factor). If any decision of the finance manager
results in increasing the risk of a share or non- diversifiable risk in the
CAPM model, then the required rate of return of the investor, ke will
also increase.
 Question : a firm pays a dividend of Rs.1.50 with a growth rate at 7%.
The risk free rate is 9% and the market rate of return is 13%. Presently
the firm has a beta of 1.50. however due to the decision of the finance
manager, beta is likely to increase to 1.75. find out the present as well
as the likely value of the share after the decision.

 Change in Return: return in the form of expected dividend stream also

affect the value of the share. If a financial decision affect the
expectations of the investors with respect to returns, then the value of
the share will also show variations. Any increase in D1 will definitely
result in increase in P0 (assuming other variables to remain unchanged)
in equation 5. so if a financial decision is expected to increase the level of
expected returns without changing the required rate of return then it
should be undertaken.
 To continue with the previous question the share has a value of Rs.18.75
at ke=15% and g=7%. now., suppose the firm announces a plan which will
increase the growth rate in dividends from 7% to 9% without any change
in ke, then the value of the share is:
P0 = D1
ke-g
P0 = 1.50 = Rs.25
.15-.09
 The increase in the share value from Rs.16.75 to Rs.25 has resulted
because of increase in future dividends as the growth rate has increased
from 7% to 9%
 In practice a financial decision will simultaneously affect the risk as well
as the return expected by the share holders. When the return increases
the risk is also expected to increase and vice-versa. However the net effect
on the value of the share depends upon the relative risk-return trade off
(the market rate of return and risk free rate being held constant).
 To continue with the same example if the required rate of return of the
investor also increases from 15% to 16% (growth rate g=9%) then the value
of the share:
P0 = 1.50 =Rs.21.43
.16-.09
Questions :
13. A company has a book value per share of Rs.137.80. its return on equity is 15%
and it follows a policy of retaining 60% of its earnings. If the opportunity cost of
capital is 18%, what should be the price of the share today? (answer g=9% and P 0=
91.90)
14. A mining company’s iron ore reserves are getting depleted, and its cost of
recovering a declining quantity of iron ore are raising each year. As a sequel to it
the company’s earnings and dividends are declining at a rate of 8% per year. If the
previous year’s dividend (D0) was Rs.10 and the required rate of return is 15%,
what should be the current price of the share of the company? (answer Rs.40)
15. The current price of a company’s share is Rs.70. the company is expected to pay a
dividend of Rs.4.20 per share and increasing with a annual growth rate of 5%. If
an investor’s required rate of return is 10%, should he buy the share? ( ke=11%,
the share maybe purchased)
16. A company is currently paying a dividend of Rs.2.00 per share . The dividend is
expected to grow at a 15% annual rate for 3 years, then at a 10% for the next 3
years, after which it is expected to grow at 5% forever. (a) what is the present
value of the share if the capitalization rate is 9%? (answer P0= 77.20).
17. A large sized chemical company has been expected to grow at 14% for the next 4
years and then to grow indefinitely at the rate 5%. The required rate of return on
the equity shares is 12%. Assume that the company paid a dividend of Rs.2 per
share last year (D0 =2). Determine the market price of the shares today. ( answer
=Rs.40.62)
18. ABC Co. has sold Rs.1,000, 12% perpetual debentures 10 years ago. Interest rates
have risen since then, so that debentures of this company are now selling at 15%
yield basis.
i) determine the current indicated/ expected market price of the debentures. Would
you like to buy the debentures for Rs.700.
ii) assume that the debentures of the company are selling at Rs.825. if the
debentures have 8 years to run to maturity, compute the approximate effective
yield an investor would earn on his investment.
(Expected market price Rs.800. effective yield is approx. 16%)

19. A chemical company has been growing @ 18% per year in recent years. This
abnormal growth is expected to continue for another 4 years; then it is likely to
grow at the normal growth rate of (gn) of 6%. The required rate of return on the
shares of the investment community is 12%, and the dividend paid per share last
year was Rs.3 (D0 =Rs.3). At what price would you as an investor be ready to buy
the shares of this company now (t=0), and at the end of years 1,2,3,4, respectively?
Will there be any extra advantage by buying these shares at t=0, or in any
subsequent four years, assuming all other things remain unchanged?
(answer P4 is Rs. 102.82, P0 is Rs.79.12 i.e. P4+PV of D1 to D4. similarly P1=Rs.85
approx and P2 =Rs.91 approx and P3 = Rs.97. no extra advantage of buying shares
at these price)