Home » **VALUATION OF BONDS AND SHARES**

Book Value Approach
This approach uses the book value per share (BVPS) as the basis of valuation of shares. The BVPS is the equity capital plus reserves mill surplus) divided by the number of outstanding equity shares. Alternatively, the BVPS is the amount per share on the sale of the assets of the company at their exact book (accounting) value minus all liabilities including preference shares. Assuming tot

OTHER APPROACHES TO VALUATION OF SHARES
In addition to the dividend valuation approach discussed in the preceding section, there are other approaches to valuation of shares. WC discuss in this Section three of these: (i) hook value, (ii) liquidation value and (iii) price-earning multiples.

Variable Growth Model
As a dividend valuation approach, this model incorporates a change in the dividend growth rate. Assuming g = initial growth rate and g = the subsequent growth rate occurs at the, end of year N, the value of the shares can be determined as follows:
Step 1: Compute the value of cash dividends at the end of each year (D) during the initial growth period (years 1 - N). Symbolically,
D, = Do *

Constant Growth Model/Gordon Model
According to this approach dividends are assumed to grow at a constant rate which is less than the required rate. This model is primarily known as the Gordon Model. The value of a share is given by Equation (4.10).
Where P = value of share
K, = required rare
g = growth rate in dividend

EXAMPLE
The per share dividend of Premier Instruments Ltd (PIL) remains constant indefinitely at Rs 10. Assuming a required rate of return of 16 per cent. compute the value of the PIL's shares.
Solution

Zero Growth Model
This approach to dividend valuation assumes a constant non-growing dividend stream. With zero growth in dividends, the value of share would equal me present value of a perpetuity of dividends (D1) discounted at K, Symbolically.
where D1 = constant dividend per share
K1 = required return of investors

VALUATION OF ORDINARY SHARES
The ordinary/equity shareholders buy/hold shares in expectation of periodic cash dividends and an increasing share value. They would buy a share when it is undervalued (i.e. its true value is more than Its market price) and sell it when its market price is more than its true value (i.e. it is overvalued). The value of a share is equal to the present value of all future dividends it i

VALUATION OF PREFERENCE SHARES
Preference shares, like debentures, are usually subject to fixed rate of return/dividend. In case of no stated maturity, their valuation is similar to perpetual bonds. Symbolically,
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EXAMPLE
For facts in Example 4.4. assume (i) the bonds of the firm pay interest semiannually, (ii) the required stated return is 14 per cent for similar-risk bonds that also pays half-yearly interest. Compute the value of the bond
Solution
Substituting the values in Equation 4.4. we get,
the value of a bond selling at a discount is lower when semiannual interest used compared to annual interest, For bond sell

Semiannual Interest and Bond Values
The procedure to value bonds paying interest semiannually (half-yearly) is similar to that illustrated for compounding interest more frequently than annually. However, here we have to find out the present value. 'The following steps are involved in computing the value of a bond when interest is paid semiannually:
• Convert annual interest, I, to semiannual interest by divi