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SECTION 1: CONCEPT OF VALUATION

 Book Value  Replacement Value  Liquidation Value Going Concern Value  Market Value  Intrinsic Value

VALUATION CONCEPTS
Book Value - Accounting concept - Value recorded in books of accounts; historical cost - BV of Assets = Historical Cost Depreciation - BV of Intangibles = Acquisition cost Amortization - BV of Debt = Stated outstanding amount - Networth = BV of assets BV of liabilities Replacement Value - Value that will be required to spend if all the assets were to replaced in current condition - Difficult to estimate - Likely to ignore intangibles and utility of existing assets

VALUATION CONCEPTS
Liquidation Value - Amount realized if the business is terminated and all assets are sold - Will not include value of intangibles - Minimum value that company will accept if sold its business Going Concern Value - Amount realized if the company sold its business as an operating business - Always higher than liquidation value - Reflects future value of assets and intangibles Market Value - Current price at which asset or security is being bought or sold in the market Intrinsic Value - Economic value - PV of cash flows expected from a security discounted at rate of return appropriated for the risk associated with the security

SECTION 2: VALUATION OF BONDS


 Features of a Bond  Bond Valuation  Bond Yield

FEATURES OF A BOND
- A long term promissory note for raising loan - Carries a promise by the borrowing company to make interest payment to the debenture holders of specified amount, at a specified time and also to repay the principal amount at the end of the specified period Face Value / Par Value - Value stated on face of the bond Coupon Rate - Interest rate on a bond ; known to bondholders - Interest = Par Value x Coupon rate - Interest paid on bond is tax deductible Maturity - Issued for a specified time and repaid at the end of it i.e. maturity Redemption Value - Value received by bondholder on maturity Market Value - Current price at which bond is being bought or sold in the market

VALUATION OF A BOND
Bond with Maturity Annual Interest Payment

n P = 7 t=1

C + (1+r)t

M (1+r)n

P = C x PVIFA r,n + M x PVIF r,n Bond with Maturity Semi Annual Interest Payment

2n P = 7 t=1
Perpetual Bond

C/2 + (1+r/2)t

M (1+r/2)2n

P = C/2 x PVIFA r/2, 2n + M x PVIF r/2,2n

P = C/ r

P = Value of bond C = Annual coupon payment M = Maturity value r = Periodic required return t = time period when payment is received

1. A Rs. 100 par value bond bearing coupon rate of 12% will mature in 5 years. What is the value of the bond, if the discount rate is 15%? Ans: Rs. 89.92 2. A Rs. 100 par value bond bears coupon rate of 14% and matures in 2 years. Interest is payable semi annually. Compute value of the bond, if the discount rate is 16%? Ans: Rs. 96.72

PRICE - YIELD RELATIONSHIP


PRICE

YIELD

PRICE CHANGES WITH TIME


VALUE OF BOND PREMIUM BOND: A PAR VALUE BOND: B DISCOUNT BOND:

2 1 0 YEARS TO MATURITY

YIELD TO MATURITY

YIELD TO MATURITY C C P = + + . (1+r) (1+r)2 800 8 90 =7 t=1 (1+r)t = = 1,000 + (1+r)8

C (1+r)n +

M (1+r)n

AT r AT r

13% RHS = 808 14% RHS = 768.1 = 13.2%

YTM = 13% + (14% - 13%)x 808 - 800 808 768.1 C + (M - P) / n YTM 0.4M + 0.6 P

1. Market price of a Rs. 1000 par value bond carrying coupon rate of 14% and maturing after 5 years is Rs. 1050. What is the approx YTM on this bond? Ans: 12.62%

SECTION 3: VALUATION OF PREFERENCE SHARES


 Preference Share Valuation

PREFERENCE SHARE VALUATION


Redeemable Preference Share

n P = 7 t=1

D + (1+rp)t

M (1+rp)n

Irredeemable Preference Share

P = D/ rp
P = Value of preference share D = Annual dividend n = Life of preference share rp = Periodic required return on preference share M = Maturity value

1. Suppose an investor is considering to buy a 12 year, 10% Rs.100 par value preference shares. The redemption price of preference share on maturity is Rs. 120. The investor's required rate of return is 11%. What should she be willing to pay for the share now? Rs. 99.24