Valuation of

shares
Group 9

Valuation of shares

What is a Share & how it is operated in the stock market?

Need for valuation?

03
When some shareholders do not give their consent
for reconstruction of the company, there
shares are valued for the purpose of
acquisition.

02
When absorption of a
company takes
place.

01
When two or more
companies
amalgamate

04
When a portion of shares is to be
given by a member of proprietary
company to another member, fair
price of these shares has to be
made by an auditor or accountant.

05
When shares are held by the partners jointly in a
company and dissolution takes place., it
becomes necessary to value the shares
for proper distribution of partnership
property among the partners.

Equity shares

Permanent capita
Equity share capital remains
permanently with the company. It is
returned only when the company is
wound up.
Equity shareholders have voting rights
and elect the management of the
company.
The rate of dividend on equity capital
depends upon the availability of surplus
funds. There is no fixed rate of dividend
on equity capital.
Equity shares do not create any
obligation to pay a fixed rate of dividend.

Voting rights
Rate of dividend
No obligation

Preference shares
Long term
Preference shares are long-term source of
finance

The earnings per share of existing

preference shareholders are not diluted if
fresh preference shares are issued
Issue of preference shares increases the
earnings of equity shareholders, i.e. it has
a leveraging benefit.
Preference shareholders do not have any
voting rights and hence do not affect the
decision making of the company.
5

EPS not diluted

Increased earnin

No voting right

Net Asset based Method

Average Profit= (Total profit/no. of year)

Net Asset= Fixed asset + C.A - C.L - Long term borrowin

Normal Profit = Capital employed*Normal rate of return

Net asset based

method
Super profit = Average profit Normal profit

Goodwill = Super profit * No. of years Purchase

Value of shares = (Net asset + goodwill)/(No. of equity shares)

Single period Valuation

Only one period is assumed and for convenience this
one period is set equal to one year. Using the
discounted cash flow approach for valuation of equity
the current price of equity share, P0 is equal to the
dividend expected during the holding period, D1 and
the price of the asset at the end of the holding period
P1.

Multi period valuation

DDM with Constant Dividend No Growth
If a) earnings remain constant period after period and b) all
earnings, E are distributed then earnings would be equal to
dividend and all dividend would be equal.

Multi period valuation

DDM with Constant Growth
If part of the earnings are retained & deployed in
business and result in growth of earnings and hence
dividend in future periods. If we simply assume that
dividend grows at a constant rate of g,

Here dividend in next period is D. For

convenience we may denote it by D1
= D0
(1+g) the dividend in Period 1. The
dividend in subsequent period 2 is D1
x (1+g) and in period thereafter is D1
x (1+g) x (1+g) = D1(1+g)2 and so
on

Multi period valuation

DDM - MULTI-STAGE GROWTH MODELS
Valuation based on constant growth of dividend is a greatly simplifying
assumption that helps explain some of the complex phenomena of the
share price valuation. However, it seems rather unrealistic that the firm
would continue to grow at the same rate forever. A more reasonable and
realistic assumption would be to assume high growth during the initial
few years. Thereafter as opportunities for extra-ordinary growth
opportunities dry up, competition catches up and firms start registering
a rather normal growth consistent with the rest of the economy.

When trying to figure out whichvaluation methodto use

to value a stock for the first time, most investors will
quickly discover the overwhelming number of valuation
techniques available to them today. There are the simpleto-use ones, such as the comparable method, and there
are the more involved methods, such as the discounted
cash flow model. Which one should you use?