Monday, November 2, 2009


Valuation of Ordinary Shares

Valuation of ordinary shares is relatively more difficult, because
  1. The rate of dividend on ordinary shares is not known.
  2. The payment of equity dividend is discretionary.
The general principal of valuation applies to the share valuation the value of a share today depends on cash flow expected by investors and risk associated with those cash inflows.
Normally a shareholder does not hold shares in perpetuity. He holds shares for some time, receives the dividends and finally sells them to a buyer to obtain capital gains. When he sells share, a new buyer is also simply purchasing a stream of future dividends and a liquidation price when he also sells the shares.

Single period valuation
Po = (DIV + P1) / (1+ Ke)

Multi Period valuation
Po = {(DIV1 + P1) / (1+ Ke)} + {(DIV 2+ P2) / (1+ Ke)2 }+ ……………….+ {(DIV n+ Pn) / (1+ Ke)n}

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