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BY
RAMAN
SURAJITRAJESH
PRIYANKA
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` Single-period Valuation model
` Expected Rate of Return
` Multi-period Valuation model
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` Here the investor expects to hold the security for 1year.
` To find out the price of the equity share after 1
year the formula is:
P=D/(1+r) + P/(1+r)Where, P=current price of the equity.
D=dividend expected a year hence
P=price of the share after a year
r=rate of return
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` The expected rate of return isr=D/P +g
Where, D=expected dividend.
P=current price of the share.
g=growth rate.
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` Equity shares have no maturity period.` The investor may be expected to bring a dividend
stream of infinite time.` Then the value of an equity will be:P=D/(1+r)+D/(1+r)+..+Dn/(1+r)
+Pn/(1+r)Where, D=expected rate of dividend after a year.
D=expected dividend after 2 year.r=expected return.
n=no. of year of holding the security.Pn=selling price after n year.
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` Zero Growth Model.` Constant Growth Model(Gordon model).
` Two stage Growth Model.
` H Model.
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` The dividend per share remain constant year afteryear.
` The price of the equity will be:
P=D/r
Where, D=dividend per year.
r=rate of return.
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` The popular dividend discount model originally
proposed by Myron.J.Gordon.
` In this model the assumption is that the dividend
per share grows at a constant rate.` The price of the equity will be;
P=D/(r-g)
Where, D=dividend after 1 year.
r=rate of return.
g=growth rate per year.
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`
It is the simplest extension of constant growth model.` It assumes that the extraordinary growth will continue
for finite no. of years and then normal growth rate will
prevail indefinitely.
So, P=D[{1-(1+g)/(1+r)}/(r-g)] +[{D(1+g)(1+g)}/(r-g)] * [1/(1+r)]
Where, D=dividend after a year.
g,g=growth rate of 1st & 2nd period
respectively.r=rate of return.
n=no. of year of the 1st period.
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`
The current dividend on an equity share is Rs.2of Altd. A ltd expected an above-normal growth rate of
20% for a period of 6 year. Thereafter the growth rate
will 10%.the rate of return 15%.
Here ,g=20%,g=10%,n=6year,r=15year,D=Rs.2(1.2)=Rs.2.40.
P=2.40[{1-(1.20/1.15)}/(.15-.2)] +
[{2.40(1.2)(1.1)}/(.15-.10)] * (1/(1.15)2
=Rs.70.76
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The value of the equity will be:P=D[(1+gn)+H(ga-gn)]/(r-gn)
Where, D=current dividend per share.
gn=normal long run growth rate.
ga=current above-normal growth rate.H=one half of the period which current above-
normal growth rate will level off to normal long run
growth rate.
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`
The value of a stock under this approach isP=E*P/E
Where, E=estimated earning per share.
P/E=price-earning ratio=(1-b)/(r-g)
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Thumb rule1:The price earnings multiple for a
share may be equated with the projected growth
rate in earnings.
Thumb rule2:For the market as a whole, a
reasonable price-earning multiple would be the
inverse of the prime interest.
Thumb rule3:For the market as a whole, a
reasonable price-earning multiple would be the
inverse of the real rate of return required by
investors from equity stocks.
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