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Valuation Of Shares Problems And Solutions Pdf

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It is expected that market value of share will in increase 5 percent. What is fair value of this share for one year if discount rate is 8 percent? The Corporation issues preferred stock that pays a dividend of Rs. For how much will the preferred stock sell?

Valuation of Shares

To browse Academia. Skip to main content. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy. Log In Sign Up. Download Free PDF. Discounted Cashflow Valuation Problems and Solutions. Gowrinath Atluri. Download PDF. A short summary of this paper. As the discount rate increases, the value of an asset increases. As the life of an asset is lengthened, the value of that asset increases.

What is the distinction? Why does it matter? Answer the following questions: A. Is his reasoning correct? Why or why not? Bills Stocks - T. Bonds Arithmetic Geometric Arithmetic Geometric 8.

What does this premium measure? Why is the geometric mean lower than the arithmetic mean for both bonds and bills? If you had to use a risk premium, would you use the most recent data , or would you use the longer periods? Explain your reasoning. Would you use this as your risk premium, looking into the future?

If not, what would you base your estimate of the premium on? The current six-month treasury bill rate is 3. Estimate the cost of equity for Eastman Kodak, based upon a using the treasury bill rate as your risk-free rate. Use the premiums in the table in question 1, if necessary. Which one of these estimates would you use in valuation? Question 4 - Estimating CAPM parameters You are trying to estimate the cost of equity to use in valuing Daimler Benz, and a data service reports a beta estimate of 0.

How would you estimate beta to meet your needs? If you were asked to value the software business for the divestiture, which beta would you use in your valuation? What will its new beta be? If you were valuing an initial public offering in the paper products area, what beta would you use in the valuation? You decide to estimate an "accounting" beta using past earnings.

Estimate the accounting beta for the private company. What are the limitations of an "accounting" beta? What does the intercept of this regression measure? What is the expected return on Paramount, using the arbitrage pricing model? The beta for Paramount is 1. Assuming a risk-free rate of 6. Why is it different from your answer in part D?

Estimate the cost of equity using the dividend growth model. Estimate the cost of equity using the CAPM. The thirty-year bond rate is 6. Which estimate will you use in valuation and why? The thirty-year government bond rate is 6. What are the market value and book value weights on debt and equity?

What is the cost of equity? What is the after-tax cost of debt? What is the cost of capital? The stock has a beta of 1. What is the cost of equity for GM? What is the after-tax cost of debt for GM? What is the cost of preferred stock? It is the dividend that is paid to stockholders. It is the cash left over after meeting debt payments and paying taxes.

None of the above. Question 2 - Cash Flows: Concepts Answer true or false to the following statements. What is the expected return, after personal taxes, to this investor? What are the expected dividends and terminal price, after personal taxes, to this investor? Question 9 - Terminal Values for Cash Flow Calculation The terminal value in a capital budgeting project is generally much lower than the initial investment.

The terminal price in a stock valuation is generally much higher than the initial investment. How would you explain the difference? Since each of these approaches yields some valuable information, it makes sense to blend them to arrive at one composite growth rate to use in the valuation. This chapter examines different approaches to estimating future growth, and discusses the determinants of growth.

Question 1 - Arithmetic and Geometric Means The following are the earnings per share of Thermo Electron, a company that designs cogeneration and resource recovery plants, from to Year EPS 0.

Estimate the arithmetic average growth rate in earnings per share from to Estimate the geometric average growth rate in earnings per share from to Why are the growth rates different? Question 2 - Linear and Log-linear Models of Earnings Growth Consider again the example of Thermo Electron, described in the prior example, using the historical data from to Estimate the growth rate from a linear regression model. Estimate the growth rate from a log-linear regression model.

Project the earnings per share in using both models. Question 3 - Dealing with Negative Earnings The earnings per share from to are reported below for McDonnell Douglas, an aircraft manufacturer with extensive defense contracts: Year EPS 7. Estimate the geometric average growth rate in earnings from to Estimate the arithmetic average growth rate in earnings from to , using a correction for the negative earnings.

Estimate the growth rate in earnings, using the linear regression model. Question 4 - Earnings Growth and ROE Johnson and Johnson, a leading manufacturer of healthcare products, had a return on equity in of Estimate the growth rate in earnings based upon numbers. Estimate the growth rate in , when the ROE drops from Estimate the growth rate after , assuming that numbers can be sustained.

Question 5 - Earnings Growth, Leverage, and Risk Eastman Kodak was, in the view of many observers, in serious need of restructuring in Eastman Kodak had a beta of 1. What is the expected growth rate in earnings, assuming that numbers remain unchanged? What will the beta of the stock be, if the restructuring plan is put into effect? Question 6 - Corporate Strategy and Expected Growth Philip Morris, a leading consumer products company, was forced to cut prices on its Marlboro brand of cigarettes in early to combat loss of sales to generic competitors.

You are attempting to assess the effects on expected growth as a consequence. Based upon numbers, what is the expected growth rate in earnings? Assuming that the asset turnover ratio remains unchanged, what will the growth rate in earnings be after the price cuts in ?

How much will the asset turnover ratio have to increase for Philip Morris to return to the growth rate it had in ? What is the expected growth rate for the high-growth phase? What form do you expect the change to take? What would you expect the growth rate in the stable growth phase to be? Question 8 - Weighting Different Estimates of Growth Rate The following are a number of valuation scenarios, where multiple estimates of growth are available.

Specify how you weight the different growth rates and why. You have fairly good information on the form the restructuring will take and its expected impact. Analysts follow the stock, but base forecasts primarily on historical growth. This chapter explores the general model and its permutations tailored for different assumptions about future growth.

Discounted Cashflow Valuation Problems and Solutions

Let us make in-depth study of the five methods of valuation of shares, i. Since the valuation is made on the basis of the assets of the company, it is known as Asset-Basis or Asset- Backing Method. At the same time, the shares are valued on the basis of real internal value of the assets of the company and that is why the method is also termed Intrinsic Value Method or Real Value Basis Method. In the case of former, the utility of the assets is to be considered for the purpose of arriving at the value of the assets, but, in the case of the latter, the realizable value of the assets is to be taken. Under this method, value of the net assets of the company is to be determined first. Thereafter, the net assets are to be divided by the number of shares in order to rind out the value of each share.

Before investing in any company, it is important for us to understand the real worth of its shares. This will be possible if we can calculate the intrinsic value of the share. The process of calculating this intrinsic value is known as share valuation. Intrinsic value refers to the value which is theoretical in nature. This means that the value is not affected by its market price. In the simplest terms, share valuation is a system of determining the value of a business by estimating the value of its shares.

Valuation of Shares: Need and Methods (With Illustrations)

In this article we will discuss about the Need and Methods required for Valuation of Shares. In most cases, shares are quoted on the stock exchange; and for ordinary transactions in shares or debentures or Government securities, the price prevailing on the stock exchange may be taken as the proper value. The stock exchange price does not hold good for very large lots. And not all shares are quoted on the stock exchange. Shares of private companies in any case will not be quoted.

Solutions to Practice Questions Bonds 1. Although bond was issued at par, the level of interest rate may change later. The face value, F. If … If its dividends are expected to grow at a rate of 3 percent per year, what is the expected dividend per share for Bulldog five years from today? They are Optional, and are not part of the required material.

Discounted Cashflow Valuation Problems and Solutions

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Methods of Valuation of Shares (5 Methods)

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Note: Theory question of 15 Marks may be divided into two sub-questions of 7/8 and 10/5 Solution: Valuation of Equity Share. Intrinsic Value Method. Building.


Corporate Accounting by

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Valuation of shares is the process of knowing the value of company‟s shares. Share Solution i) Computation of Goodwill: Calculation of average capital employed: Rs. problem or there is a clear increasing trend in profits from year to year.

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