valuation of equity
Valuation of equity
Example based on dividend discount model :
Vardhman limited’s earnings and dividends have been growing at a rate of 18% per annum. This growth rate is expected to continue for 4 years. After that the growth rate will fall to 12 % for the next 4 years. Thereafter, the growth rate is expected to be 6 % forever. If the last dividend per share was RS. 2.00 And the investor’s required rate of return on verdhman’s equity is 15% what is the intrinsic value per share?
Step 1: the dividend stream during first eight years when growth rate is high year Dividend PRESENT value of dividend
Dividend * (PVIF 15%)
1 D1 =2.00(1.18) =2.36 2.36*(0.870) = 2.05
2 D2 =2(1.18)2 =2.78 2.78*(0.756)= 2.10
3 D3=2.00(1.18)3 =3.29 3.29*(0.658)= 2.16
4 D4=2.00(1.18)4 =3.88 3.88*(0.572)=2.22
5 D5=2.00(1.18)5 (1.12) = 4.34 4.34*(0.497)= 2.16
6 D6=2.00(1.18)6(1.12)2 =4.86 4.86*(0.432)= 2.10
7 D7=2.00(1.18)7(1.12)3 =5.45 5.45*(0.376)= 2.05
8 D8=2.00(1.18)8(1.12)4 =6.10 6.10*(0.327)= 1.99
∑ = RS.16.83
Step 2: the present value of the price of the share at the end of 8 years, P8 = D9 r – gn =D8(1+gn) r– gn = 2.00(1.18)4(1.12)4(1.16) 0.15 – 0.06 = RS.71.84 The present value of this price is:
= 23.49 71.84 (1.15)8 Step 3: the sum of above components is: P0 = RS.16.83 + RS.23.49 = RS.40.32
Example based on two stage growth model :
The current dividend on an equity share of pioneer technology is RS. 3 . pioneer is expected to enjoy an above normal growth rate of 40 % for 5 years . thereafter,
Example based on dividend discount model :
Vardhman limited’s earnings and dividends have been growing at a rate of 18% per annum. This growth rate is expected to continue for 4 years. After that the growth rate will fall to 12 % for the next 4 years. Thereafter, the growth rate is expected to be 6 % forever. If the last dividend per share was RS. 2.00 And the investor’s required rate of return on verdhman’s equity is 15% what is the intrinsic value per share?
Step 1: the dividend stream during first eight years when growth rate is high year Dividend PRESENT value of dividend
Dividend * (PVIF 15%)
1 D1 =2.00(1.18) =2.36 2.36*(0.870) = 2.05
2 D2 =2(1.18)2 =2.78 2.78*(0.756)= 2.10
3 D3=2.00(1.18)3 =3.29 3.29*(0.658)= 2.16
4 D4=2.00(1.18)4 =3.88 3.88*(0.572)=2.22
5 D5=2.00(1.18)5 (1.12) = 4.34 4.34*(0.497)= 2.16
6 D6=2.00(1.18)6(1.12)2 =4.86 4.86*(0.432)= 2.10
7 D7=2.00(1.18)7(1.12)3 =5.45 5.45*(0.376)= 2.05
8 D8=2.00(1.18)8(1.12)4 =6.10 6.10*(0.327)= 1.99
∑ = RS.16.83
Step 2: the present value of the price of the share at the end of 8 years, P8 = D9 r – gn =D8(1+gn) r– gn = 2.00(1.18)4(1.12)4(1.16) 0.15 – 0.06 = RS.71.84 The present value of this price is:
= 23.49 71.84 (1.15)8 Step 3: the sum of above components is: P0 = RS.16.83 + RS.23.49 = RS.40.32
Example based on two stage growth model :
The current dividend on an equity share of pioneer technology is RS. 3 . pioneer is expected to enjoy an above normal growth rate of 40 % for 5 years . thereafter,