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Security Valuation in Bond, Equity, Pref. Share Valuation
- 1. Sri Ramakrishna College of Arts & Science Coimbatore – 06. Topic: Share Valuation M.VADIVEL Assistant Professor Department of B.Com PA Sri Ramakrishna College of Arts & Science Coimbatore.
- 4. Valuation of Bond Exp:1 If X purchases a 5-year 1000 par value bond being nominal rate of interest at 7% what should he be willing to pay now to get a required rate of 8% to purchase the bond if on maturity he will receive the bond value at par?
- 5. Year Annual Interest P.V Factor Present Value 1 70 .926 64.82 2 70 .857 59.99 3 70 .794 55.58 4 70 .735 51.45 5 70 .681 47.65 Present value of interest flows 279.49 5 years maturity value 1,000 .681 681.00 Value of bond 960.49
- 6. Valuation of Equity Equity Value = Total Shares Outstanding * Current Share Price. Equity Value = Enterprise Value – Debt. Enterprise Value = Market Capitalisation + Debt + Minority Shareholdings + Preference Shares – Cash & Cash Equivalents. CIA CE Total
- 7. Value of Preference Shares: Preference shares give a fixed rate of dividend but without a maturity date. Preference shares are usually perpetuities but sometimes they do have maturity dates also. • V = Value of Preference Share • D = Annual Dividend per Preference Share • i = Discount Rate on Preference Shares
- 8. V = D/i Exp: 1 A company sold its preference shares @ Rs. 50 last year. The discount rate at that time was 8%. The company pays an annual dividend of Rs. 4. The type of Preference Share is currently yielding 6%. What is the value of the company’s Preference Shares? Answer: V = 4/.06 = 66.67
- 9. Yield on Preference Shares: The yield on Preference Shares is calculated in the following manner: D i = D/V Exp: 1 ... If current price of a preference share is Rs. 60 and annual dividend is Rs. 4, what is the yield on Preference Shares? Answer: i = D/V = 4/60 = 6.67%
- 11. YTM is typically expressed as an annual percentage rate (APR). It is determined through the use of the following formula: Formula: FV - PV C + t YTM = FV + PV 2
- 12. • C – Interest/coupon payment • FV – Face value of the security • PV – Present value/price of the security • t – How many years it takes the security to reach maturity
- 13. Exp: 1 Assume that there is a bond on the market priced at $850 and that the bond comes with a face value of $1,000 (a fairly common face value for bonds). On this bond, yearly coupons are $150. The coupon rate for the bond is 15% and the bond will reach maturity in 7 years.
- 14. FV - PV C + t YTM = FV + PV 2
- 15. 1,000 - 850 150 + 7 YTM = 1,000 + 850 2 Rs. = Rs.18.53 %
- 16. Thank You……