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Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
Cf%20valuation%20of%20 Securities%205
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Cf%20valuation%20of%20 Securities%205

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FINANCE,CFM

FINANCE,CFM

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  • 1. Valuation of Long Term Securities
    • What is a cynic? A man who knows the price of everything and the value of nothing.
    • Oscar Wilde
  • 2. Valuation
    • Liquidation value
    • Book value
    • Market value
    • Intrinsic value
  • 3. Discounted Cashflow Model
    • The value of an asset is the present value of its expected cashflows discounted at a risk adjusted required rate of return.
  • 4. Discounted Cashflow
    • V = C 1 /(1+r) + C 2 /(1+r) 2 + C 3 /(1+r) 3 +….+
    • (C n + M) / (1+r) n
  • 5. Required Rate of Return
    • Time
    • Inflation
    • Risk
  • 6.
    • All securities in an equivalent risk class are priced to offer the same expected return.
  • 7. Bond Valuation
    • Face value
    • Coupon rate
    • Maturity
    • Future cashflows
  • 8. Bond Valuation
    • V = C 1 /(1+r) + C 2 /(1+r) 2 + C 3 /(1+r) 3 +….+
    • (C n + M) / (1+r) n
    • Where C 1 …..C n are the coupon payments, M is the maturity value.
    • r is the discount rate and V is the value of the bond.
  • 9. Bond Valuation
    • V = C* PVIFA r,n + M * PVIF r,n
    • Rs 100 FV. 10% coupon. 9 years maturity.
    • 12% discount rate.
    • = 10 * PVIFA (12%.9years) + 100 * PVIF(12%.9years)
    • = 10 *5.328 + 100 * 0.361 = 89.38
    • 8% discount rate.
    • = 10 * PVIFA (8%.9years) + 100 * PVIF(8%.9years)
    • = 10* 6.247 + 100 * 0.5 = 112.47
  • 10. Zero Coupon Bond
    • No periodic payment of interest. Sold at discount to face value.
    • V = Maturity value * 1/ (1+r) n
    • = Maturity value * PVIF r,n
    • 1000 FV. 10 years. 12% discount rate.
    • Value = 1000 * 0.322 = Rs 322
  • 11. Perpetual Bonds
    • A bond that does not mature and hence, pays constant interest forever.
    • V = C/ r
  • 12. Yield to Maturity
    • The discount rate that equates the present value of all the future cashflows of the bond to the current market price
    • Interest rate risk. Relationship between interest rate and bond prices
  • 13. Valuation of shares
    • Value of a share equals the present value of expected future dividends.
    • Dividend Discount Model
  • 14. Valuing Common Stocks
    • Expected Return - The percentage yield that an investor forecasts from a specific investment over a set period of time. Sometimes called the market capitalization rate .
  • 15. Valuing Common Stocks
    • Example: If Fledgling Electronics is selling for $100 per share today and is expected to sell for $110 one year from now, what is the expected return if the dividend one year from now is forecasted to be $5.00?
  • 16. Valuing Common Stocks
    • The formula can be broken into two parts.
    • Dividend Yield + Capital Appreciation
  • 17. Valuing Common Stocks
    • Price = P 0 =(Div 1 + P 1 )/ (1+r)
    • Current price based on forecasted dividend, forecasted price and discount rate
  • 18. Valuing Common Stocks
    • Dividend Discount Model - Computation of today’s stock price which states that share value equals the present value of all expected future dividends.
    • H - Time horizon for your investment.
  • 19. Valuing Common Stocks
    • Example
    • Current forecasts are for XYZ Company to pay dividends of $3, $3.24, and $3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of $94.48. What is the price of the stock given a 12% expected return?
  • 20. Valuing Common Stocks
    • Example
    • Current forecasts are for XYZ Company to pay dividends of $3, $3.24, and $3.50 over the next three years, respectively. At the end of three years you anticipate selling your stock at a market price of $94.48. What is the price of the stock given a 12% expected return?
  • 21. Valuing Common Stocks
    • If we forecast no growth, and plan to hold out stock indefinitely, we will then value the stock as a PERPETUITY .
  • 22. Valuing Common Stocks
    • If we forecast no growth, and plan to hold out stock indefinitely, we will then value the stock as a PERPETUITY .
    Assumes all earnings are paid to shareholders.
  • 23. Valuing Common Stocks
    • Constant Growth DDM - A version of the dividend growth model in which dividends grow at a constant rate (Gordon Growth Model) .
  • 24. Valuing Common Stocks
    • If the same stock is selling for $100 in the stock market, what might the market be assuming about the growth in dividends?
    Answer The market is assuming the dividend will grow at 9% per year, indefinitely.
  • 25. Valuing Common Stocks
    • If a firm elects to pay a lower dividend, and reinvest the funds, the stock price may increase because future dividends may be higher.
    • Payout Ratio - Fraction of earnings paid out as dividends
    • Plowback Ratio - Fraction of earnings retained by the firm.
  • 26. Valuing Common Stocks
    • Growth can be derived from applying the return on equity to the percentage of earnings plowed back into operations.
    • g = return on equity X plowback ratio
  • 27. Valuing Common Stocks
    • Our company forecasts to pay a $5.00 dividend next year, which represents 100% of its earnings. This will provide investors with a 12% expected return. Instead, we decide to plow back 40% of the earnings at the firm’s current return on equity of 20%. What is the value of the stock before and after the plowback decision?
  • 28. Valuing Common Stocks
    • Our company forecasts to pay a $5.00 dividend next year, which represents 100% of its earnings. This will provide investors with a 12% expected return. Instead, we decide to blow back 40% of the earnings at the firm’s current return on equity of 20%. What is the value of the stock before and after the plowback decision?
    No Growth With Growth
  • 29. Valuing Common Stocks
    • Example - continued
    • If the company did not plowback some earnings, the stock price would remain at $41.67. With the plowback, the price rose to $75.00.
    • The difference between these two numbers (75.00-41.67=33.33) is called the Present Value of Growth Opportunities (PVGO).
  • 30. Valuing Common Stocks
    • Present Value of Growth Opportunities (PVGO) - Net present value of a firm’s future investments.
    • Sustainable Growth Rate - Steady rate at which a firm can grow: plowback ratio X return on equity.
  • 31. Price Earnings Ratio
    • Relationship of growth with P/E ratio
    • Shareholder value created thru investments that yield returns in excess of COC
  • 32. Growth vs Return
    • ROIC Growth P/E
    • Growth Inc 14% 13% 17
    • Returns Inc 35% 5% 17

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