Equity Valuation
Single Period
Multi period
Growth
Shalma Pinto
Suneeta Bhat
Saurabh Priyadarshi
SINGLE PERIOD VALUATION
MODEL
P0 = D1/(1+r) + P1/(1+r)
P0 = D1/(r-g)
r = (D1/ P0) +g
• ABB Company’s equity share is
expected to provide a
dividend of Rs2 and fetch a
price of Rs 17 a year hence.
What price would it sell for
now if investors’ required rate
of return is 12 percent?
P0 = D1/(1+r) + P1/(1+r)
=2/(1.12)+17/(1.12)
=16.95
• The expected dividend per share
on the equity share of Roadking
Ltd is Rs 2. the dividend per share
of Roadking Ltd has grown over
the past five years at the rate of
5% per year. This growth rate will
continue in future. Further, the
market price of the equity share
of Roadking Ltd, too, is expected
to grow at same rate. What is a
fair estimate of the intrinsic value
of the equity share of Roadking
Ltd if the required rate is 15%?
P0 = D1/(r-g)
=2/(0.15-0.05)
= Rs 20
• The expected dividend per
share of Vaibhav Ltd is Rs 5.
the dividend is expected to
grow at the same rate of 6%
per year. If the price per share
now is Rs 50, what is the
expected rate of return?
r = (D1/ P0) +g
= (5/50)+0.06
= 16 percent.
• Formulae:
• Po=Di/(i-g)
• V=D1/(1+k)+D2(1+k)^2+D3/(k-g2)/(1+k)^2
• D1=(EPSo)(1+g)(D/P ratio)
• Dn=Dn-1(1+gn-1)
• g=ROE(1-D/P ratio)
• Po=€Do(1+g1)^i/(1+k)^i + Dn(1+g1)^i(1+g2) /((k-g2)
(1+k)^n)
• The expected earnings per share
is Rs. 3 and dividend Rs. 2
respectively. If the required rate
of return is 15%, what should be
the share price assuming g= 0%,
5%, 10%
• Given: D =2, i=0.15
i
a) g=0
b)g=0.05
c) g=0.10
Formula:Po=Di/(i-g)
A) Po=Di/(i-g)
= 2/(0.15-0)= 13.33
B) Po=Di/(i-g)
=2/(0.15-0.05)=20
c) Po=Di/(i-g)
=2/(0.15-0.10)=40
• Novex Industries, a firm is operating in
a mature industry and is expected to
maintain a constant dividend payout
ratio and constant growth rate of
earnings. Earnings were Rs. 4 per
share in the recently completed fiscal
year. The dividend payout ratio has
been constant 50% in recent years and
is expected to remain so. Novex’s
return on equity is expected to remain
15% in the future, and you require
12% return on equity.
Calculate the current value of
Novex’s equity, using the DDM,
assuming that noVex will grow at 20%
for the next 2 years, returning in the
third year to the historical growth
rate.
V=D1/(1+k)+D2(1+k)^2+D3/(k-g2)/(1+k)^2
• Given k=0.12
D1=(EPSo)(1+g)(D/P ratio)
= 4*(1+0.2)(0.5)= 2.4
D2=D1(1+g1)
=2.4(1+0.2)=2.88
D3=D2(1+g2)
=2.88(1+0.075) where g2=ROE(1-D/P ratio)
= 0.15(1-0.5)= 0.075
Value=2.4/(1+0.12)+ 2.88(1+0.12)^2 +
3.096/(0.12-0.075)/(1+.12)^2
= (2.4/1.12) +(2.88/1.2544) +(3.096/0.045/1.2544)
=59.29
• TCL is showing a dividend
growth rate of 20%. After 5
years, its expected to
slowdown and come to normal
growth rate of 6%. Its required
rate of return is 15% and its
present dividend is Rs. 0.50 per
share. What is the current
value of its stock.
Formula: Po=€Do(1+g1)^i/(1+k)^i +
Dn(1+g1)^i(1+g2) /((k-g2)(1+k)^n)
Given: Do=0.50, g1=20, g2=6, k=15, n=5
Po=€ 0.5(1+0.2)^5/(1+0.15)^5 + 0.5(1+0.2)
(1+0.06)^5/((0.15-0.06)(1+0.15)^3)
= 0.5(1+0.2)^1/(1+0.15)^1+
0.5(1+0.2)^2/(1+0.15)^2+
0.5(1+0.2)^3/(1+0.15)^3+
0.5(1+0.2)^4/(1+0.15)^4+
0.5(1+0.2)^5/(1+0.15)^5+
0.5 (1+0.06)(1+0.2) ^5/((0.15-0.06)(1+0.15)^ 5)
= 0.522+0.544+0.568+0.598+0.619+7.285
=10.136
The current value of the stock should be Rs. 10.14
1. Zero Growth (Constant Dividend) Model
A. Solving for Price:
V = D/k, where D = dividend and k = required return
What would an investor be willing to pay for a stock if she expected to receive
a dividend of $2.50 each year indefinitely and her required return is 15%?
D $ 2.50
k 15.00% \
V? ( $ 16.67 )
B. Solving for Return: k = D/V
What rate of return would an investor expect if the current price of a stock is
$119 and she expected the firm to pay a constant dividend of $4/year?
V $ 119.00
D $ 4.00
k? (3.4%)
2. Constant Growth Model
A. Solving for Price:
V = D0(1+g)/k-g = D1/(k-g) , where D0 = current dividend, k = required
return, and g = growth rate
What would an investor be willing to pay for a stock if she just received a
dividend of $2.50, her required return is 15%, and she expected dividneds to
grow at a rate of 5% per year.
D0 $ 2.50
k 13.00%
g 4.00%
V? ( $ 28.89)
B. Solving for Return: k = D0(1+g)/V + g = D1/V + g
What is my expected return on a stock that costs $26.50, just paid a dividend
of $2.50, and has an expected growth rate of 5%?
D0 $ 2.50
V $ 26.25
g 5.00%
k? ( 15.00%)
3. Non-Constant Growth Model
A. Solving for Price: This model involves the computation of year-to-year
dividends which are then dicounted at the investors required rate of return.
What would an investor be willing to pay for a stock if she just received a
dividend of $2.50, her required return is 15%, and she expected dividneds to
grow at a rate of 10% per year for the first two years, and then at a rate of 5%
thereafter.
Step 1:
Compute the expected dividends during the first growth period.
g 10.0%
D0 $ 2.50
D1 $ 2.75
D2 $ 3.03
Step 2:
Compute the Estimated Value of the stock at the end of year 2 using the
Constant Growth Model
D2 $ 3.03
k 15.00%
g 5.00%
V2? $ ( 31.76)
Step 3:
Compute the Present Value of all expected cash flows to find the price
of the stock today.
Cash Flow PV( at 15% )
1 D1 $ 2.75 $ 2.39 2
2 D2 $ 3.03 $ 2.29 3
V2? $ 31.76 $ 20.88
V0 ? $ 25.56
Thank you
