Valuation of Securities pera Toles massdValuation based on Dividend Distributed (Dividend Discount Model) Based on expected future dividends and sale price expected when equity share is sold on the rationality that firm is going entity. According to this approach, current value of share is the capitalised value of dividend likely to be received in the future. 3 assumptions: Dividends are paid annually e Dividends are paid exactly after one year from the date of purc! The growth rate of dividend is constant to be maintained till iDifferent methods under Dividend Discount Model Single period Valuation Model e Multi-period Valuation Model «Zero Growth Model Dividend Capitalisation/ Constant Growth Model Multi-Staged Growth Model1. Single Period Valuation Model The investor purchases now, hold it for one year and sell it of at the end of the next year. The investor would be expected to receive an amount of dividend as well as the selling price after one year. S= D+ D,: Amount of dividend expected to be received at the end of the —_—— year. (1+k)"—— (1+k)" Sy: Selling Price expected to be realized on sal year. k: Rate of return required by the investFor Example: If an investor expects to get Rs. 4 as dividend from a share next year and hopes to sell off the share at Rs 45 after holding it for one year, and if required rate of return is 25%, the present value of his share to the investor can be calculated as follows S= p+ sg, = at 45 (1K) g (140.25) (1+0.25)' 14k)? 2g = 39.2 Here, the investor would buy shares only if its below the current market2. Multi-period Valuation Model The investor may hold the shares for more than one year and sell it off at the end of his holding period. It takes into account the dividend stream of nyears and an expected price at the end of n years. The present value of shares may be expressed as D, Dd, Ds Dy Sn So = tS tS (14k)? (1+k)?_— (1k)? (1tk)— (1+ky Di, Dz, Ds, ... Dn: Annual dividend received each year. Sant Sale price at the end of the holding period k: Required rate of return n Holding period in yearsIf an investor gets Rs 3.5, Rs 4 and Rs 4.5 as dividend from a shareduring the next three years and hopes to sell it off at Rs 75 at the end of the third year, and his required rate of return is 25%, the present value can be calculated as So= 3.50 * a7 fis 75 =2.9 +26 2880+ ghle2” (1025 (140.25 = 46.06Q) An investor expects to receive Rs 45, Rs 50 and Rs 55 as dividend from a share during the next 3 years and hopes to sell it off at Rs 405 at the end of the third year. The required rate of return is 20%. Calculate present value of share.Q) An investor expects to receive Rs 45, Rs 50 and Rs 55 as dividend from a share during the next 3 years and hopes to sell it off at Rs 405 at the end of the third year. The required rate of return is 20%. Calculate present value of share. A) So= + ++ 50 405 = 37. $4 9842 + 3169 Ph34.3f 020" (71020 = 338.423. Constant Growth Model This model assumes that the dividend grows at a fixed percentage annually. The intrinsic value of share is equal to the next year’s expected dividend divided by the difference between the appropriate discount rate for the stock and is expected dividend growth rate. The model requires a dividend growth rate assumptions and a discount rate and both of these can be estimated without much difficulty D,: Expected dividend per share to be paid next yea So= 9,100 p p p y —_ r: Rate of return expected rg g: Constant rate of return4. Zero Growth Model This model assumes that the dividend remains same every year. i.e no growth in dividends D: Dividend paid r: Rate of return expected5. Multi-stage Growth Model - A.k.a Super Normal Growth in Dividends - Initially, dividends grow at a higher rate and then grows at a constant rate. - Suitable when there is an unstable initial growth rate and stable growth in the second stage - Present value calculation is done in two stages Stage one until time “n” where dividend varies each year Stage two after time “n” to infinity where dividend growth is assumed to be constantSteps: Calculate dividend during Super Normal Growth period Calculate present value of dividends (referred to as A) Calculate value of equity at the end of equity at the end of SNG period by oT Ve = x 1081 Dn+1: Dividend immediately after SNG period rg Ve: Value of equity shares at the end of SNG period r ected,rate of return Calculate present value (referred tS as ij . . : stant cate of growth in dividend «Value of equity shares is the total OP ATER? °F Ow" maidenDividend growth rate of X Ltd. expected during the next 4 years is 12 % per annum and thereafter a constant rate of 5% per annum. If an investor expects a return of 14% per annum, find value of shares where the current dividend per share is Rs. 8 Year Dividends (x) PVDF @ 14% Present Value 1 8.96 (8x 1.12) 0.877 7.86 2 10.03 (8.96 x 1.12) 0.769 771 3 11.23 (10.03 x 1.12) 0.675 7.58 4 12.58 (11.23 x 1.12) 0.592 7.45 Total PV (A)Dr: 14% Ve = je g: 5% rg Ds = 12.58 x 1.05 = 13.21 = x 100 = 146.78 13.21 14-5 Present value of Ve(B): 146.78 X 0.592 = 86.89 Value of A + B = 30.6 + 86.89 = 117.49 per shareQ) Current dividend per share is Rs 5, growth expected during the next 5 years is 10% p.a thereafter the dividends are likely to grow at a discounted rate of 7% p.a If the investor expects a return of 16% p.a find out what the value of these shares for this investor. Period | 16% 1 0.862 2 0.743 3 | 0.641 4 0.552 5 0.476Q) Current dividend per share is Rs 5, growth expected during the next 5 years is 10% p.a thereafter the dividends are likely to grow at a discounted rate of 7% p.a If the investor expects a return of 16% p.a find out what the value of these shares for this investor. Year Dividends (x) PVDF @ 16% Present Value 1 5.50 (5 x 1.10) 0.862 474 2 6.05 (5.50 x 1.10) 0.743 4.50 3 6.66 (6.05 x 1.10) 0.641 4.26 4 7.32 (6.66 x 1.10) 0.552 4.04 5 8.06 (7.32 x 1.10) 0.476 Total PV (A)Dr: 16% Ve = je g: 7% rg De = 8.06 x 1.07 = 8.62 = x 100 = 95.78 8.62 16-7 Present value of Ve(B): 95.78 X 0.476 = 45.59 Value of A + B = 21.38+ 45.59 = 66.97per shareTHANK YOU