UNIT 3: VALUATION OF SECURITIES

GROUP : 4

Valuation of Securities One of the most important functions of

financial management is to enhance the market value of the securities of the organization and thereby increase the wealth of the organization.

Securities are valued on different basis such as book value, market value, intrinsic value etc.

Concept of Value

1. Book value 2. Market value 3. Intrinsic value 4. Going concern value 5. Liquidation value

Bond & Stocks

A bond is a promissory note or an instrument of indebtedness of the business unit or government.

Bonds values and Yields

Present Value of Redeemable Bond or Debenture

Value=(INT*PVIFA)+(R.V*PVIF)

=(INT * (1 - 1 )+ (R.V* ( 1 )

(1+r)ⁿ (1+r)ⁿ

r

I=Interest n= no of year

R.V= Redeem value

r= rate of return

Present Value of Irredeemable Bond Or Debenture

VALUE= INTEREST

rate

Expectation Theory “ Expectancy theory emphasizes the

needs for organizations to relate rewards directly to performance and to ensure that the rewards provided are those rewards deserved and wanted by the recipients.“

expectation theory is a strategy used to predict the future performance of interest rates

This theory can be use in prediction of short term interest rates

Valuation of Preference Shares Present Value Of Redeemable Preference

Shares

VALUE=DIV*PVIFA+R.V*PVIF

=(DIV * (1 - 1 )+ (R.V* ( 1 )

(1+r)ⁿ (1+r)ⁿ

r

D= dividend n= no of year

R.V= Redeem value

r= rate of return

Present Values Of Irredeemable Preference Shares

VALUE= DIV

r

Valuation of Equity Shares Methods of Valuation of Equity

shares: 1. Dividend capitalization method 2. Earning capitalization method 3. Dividend capitalization method:

Valuation Models Under Dividend Capitalization Method

A. finite period valuation Model

Po=Dividend*PVIFA+M.P* PVIF

=(DIV * (1 - 1 )+ (M.V* ( 1 )

(1+r)ⁿ (1+r)ⁿ

r

D=Dividend n= no of year

M.V= Market price

r= rate of return

B. Multi period a. Constant Dividend rate: Po= Dividend

r

b. Constant Growth in Dividend

Po= Dividend

r – g

c. Variable Growth in Dividend

Po= Dividend

r - g

2 Earning Capitalization Method

Po=Earnings

r P0 = Current price of an equity share. E1 = Expected earnings per share r= required rate of return on equity

shares

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