Equity valuation

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Equity valuation

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Equity shares can be described more easily than fixed income securities. However, they are more difficult to analyze. Fixed income securities typically have a limited life and a well-defined cash flow stream. Equity shares have neither. While the basic principles of valuation are the same for fixed income securities as well as equity shares, the factors of growth and risk create greater complexity in the case of equity shares. As our discussion of market efficiency suggested, identifying miss-priced securities is not easy. Yet there are enough chinks in the efficient market hypothesis and hence the search for miss-priced securities cannot be dismissed out of hand. Moreover, remember that is the ongoing search for miss-priced securities by any army of equity analysts that contributes to a high degree of market efficiency. Fundamental analysts assess the fair market value of equity shares by examining the assets, earnings prospects, cash flow projections, and dividend potential. Fundamental analysts differ from technical analysts who essentially rely on price and volume trends and other market indicators to identify trading opportunities.

Introduction
Security analysis and portfolio management
1. Concept of portfolio
2. Objectives of portfolio management
Equity valuation
Fundamental analysis
1. Macro economic analysis
Industry analysis
1. Industry life cycle
2. Company analysis
Technical analysis
Models in equity valuation
1. Dividend discount model
2. H model
Earnings multiplier approach
1. Determinants of the P/E ratio
Multiperiod valuation
1. Zero growth model
2. Constant growth model (Gordon Model):
Points to be considered (conclusion)

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[...] Expected Return , And Growth introduction TO SECURITY ANALYSIS AND PORT FOLIO MANAGEMENT Security : Equity Shares, bonds, debentures or any other marketable instruments are popularly termed as securities. There are various sources by which corporate raises funds from public. Security Analysis : For making proper investment involving both risk and return the investor has to make study of the alternative avenues of the investment their risk and return characteristics make a proper projection or expectation of the risk an return of alternative investment under consideration. [...]

[...] MODELS IN EQUITY VALUATION: BALANCE SHEET VALUATION: The balance sheet of the firm to get a handle on some valuation measures. Three measures derived from the balance sheet are: 1. Book Value 2. Liquidation Value 3. Replacement Cost 1. Book Value: The book value per share is simply the net worth of the company (which is equal to paid up equity plus reserves and surplus divided by the number of outstanding equity shares. Balance sheet figures rarely reflect earning power and hence the book value per share cannot be regarded as a good proxy for true investment value Liquidation Value: The liquidation value per share is equal to : Value realized from liquidating _ Amount to be paid to all the creditors and all the assets for the firm preference shareholders Number of outstanding equity shares 3. [...]

[...] Single Period Valuation Model: Let us begin with the case where the investor expects to hold the equity share for one year. The price of the equity share will be Where Po = Current price of the equity share D1 = Dividend expected a year hence P1 = Price of the share expected a year hence r = rate of return on the equity share. Expected Rate of Return: The intrinsic value of an equity share, given information about i. [...]

[...] Interest Rates: Interest rates vary with maturity, default risk, inflation rate, productivity of capital, special features and so on . INDUSTRY ANALYSIS: An industry is a group of firms that have similar technological structure of production and produce similar products. An analysis of industry helps in identifying opportunities for investment purpose and requires careful assessment of its ability to maintain its profitability in the long run to deserve investment . Industry Life Cycle : Many industrial economists believe that the development of almost every industry may be analyzed in terms of a life cycle with four well-defined stages Pioneering stage 2. [...]

[...] In multi-period valuation model the dividends are considered for three years for determining the price of the equity share. The dividend per share remains constant forever, implying that the growth rate is nil (zero growth model). The dividend per share grows at a constant rate per year forever (the constant growth model). The dividend per share grows at a constant extraordinary rate for a finite period, followed by a constant normal rate of growth forever thereafter (the two-stage model). The dividend per share, currently growing at an above-normal rate, experiences a gradually declining rate of growth for a while. [...]

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