Introduction to Equity Valuation

Pages: 49 (8453 words) Published: October 21, 2009

Equity shares can be described more easily than fixed income securities. However, they are more difficult to analyse. Fixed income securities typically have a limited life and a well-defined cash flow stream. Equity shares have neither. While the basic principles of valuation are the same for fixed income securities as well as equity shares, the factors of growth and risk create greater complexity in the case of equity shares . As our discussion of market efficiency suggested, identifying mispriced securities is not easy. Yet there are enough chinks in the efficient market hypothesis and hence the search for mispriced securities cannot be dismissed out of hand. Moreover, remember that is the ongoing search for mispriced securities by any army of equity analysts that contributes to a high degree of market efficiency.

Equity analysts employ two kinds of analysis. They are as follows : ➢ Fundamental Analysis
➢ Technical Analysis
Fundamental analysts assess the fair market value of equity shares by examining the assets, earnings prospects, cash flow projections, and dividend potential. Fundamental analysts differ from technical analysts who essentially rely on price and volume trends and other market indicators to identify trading opportunities.

Equity Valuation : Equity valuation has different models .They are as follows .

Balance Sheet Valuation :
Balance sheet of the firm to get a handle on some valuation measures . The three measures derived from the balance sheet are as follows : ▪ Book Value
▪ Liquidation Value
▪ Replacement Cost
Dividend Discount Model :In Dividend discount model the dividends are paid annually and the first dividend is received one year after the equity share is bought. ▪ Single –period Valuation Model

▪ Expected Rate of Return
▪ Multi –period Valuation Model
▪ Zero Growth Model
▪ Constant Growth Model (Gordon Model)
▪ Two Stage Growth Model
▪ H Model
▪ Earnings Multiplier Approach
▪ Earnings-Price Ratio , Expected Return , And Growth


❖ To comprehend the conceptual determinants of equity by applying various approaches of valuation. . ❖ To focus on the intrinsic value of a stock using the zero growth model, the constant growth model, the two-stage growth model and the H model. ❖ To examine the growth of dividends and the earnings per share and its impact. ❖ To identify the price of the equity share and the required rate of return. ❖ To analyze the determinants of the P/E ratio and its effect on equity.


Data is collected from primary data and secondary data.

• Data collected from Brokers and Magazines, Annual Reports. • Data collected from Hyderabad Stock Exchange.


• Data collected from various Books, Newspapers and Internet. • Data provided by Hyderabad Stock Exchange as a Part of the class undertaken.

Detailed calculation of different Equity Valuation Models has been given in Annexures.

Rapid growth in industries in the erstwhile Hyderabad State saw efforts at starting the Stock Exchange. In November, 1941 some leading bankers and brokers formed the share and stock Brokers Association. In 1942, Mr.Gulab Mohammed, the Finance Minister formed a Committee for the purpose of constituting Rules and Regulations of the Stock Exchange. Sri Purushothamdas Thakurdas, President and Founder Member of Hyderabad Stock Exchange performed the opening ceremony of the Exchange on 14.11.1943 under Hyderabad Companies Act, Mr.Kamal Yar Jung Bahadur was the first President of the Exchange. The HSE started functioning under Hyderabad Securities Contract Act of No. 21 of 1352 under H.E.H. Nizam’s Government as...
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