Valuation of securities

lecture notes
By
Zeeshan Sardar

Topics covered in these notes:

Let’s start:
The term “valuation” refers to, finding out market price of a security.
Securities can be
1. bonds
2. Stocks
Buyers and sellers want to find the correct price of securities and that is
achieved by finding intrinsic value of security.
Intrinsic value of security: we call it the real value/actual value of
security; we find it by finding out the PV of all the future cash flows of
that security.

3 things we need to find intrinsic value

V0= Present value or value now

General valuation method:

Example: Find intrinsic value:

So intrinsic value=880.8 & we will not buy this security over this
880.8 price
Example 2:

Bond valuation

So the max value we can pay for this bond is 832.3922 Rs

We can also call this 832.3922 as intrinsic value of this bond.
 If we want to solve using tables

Yeild to maturity(YTM)
Return that the bond will give over the life of the bond.
We will find K

Example 2: we want to find what return we will get if we

buy this bond at this price over the course of its life

So at 10% we don’t get our value of bond i.e 1150

So 1150-938.54=-211.44 , “since we want to increase the
value we will reduce the intrest rate”
We take it at 5% we get answer 159

Interpolating

Answer: So we will not purchase this bond as its return is

7.14% and we wanted 15%
Example 2:
Prefered stock valuation:

Value of prefered share

 Example

If we want to find Kp(YTM) , when VP and Dp

are given:

So we find YTM on prefered share:

Formula:

Example:
 General valuation model:
Till now we have discussed these 5 things

Going concern buisness

What is a going concern buisness?
If future earning power is more than assets price - liabilities
Then it is going concern buisness.
But if future earning power is less than
assests value – liabilities then we must sell assets and return
liabilities
 Valuation of common stock
We canot find intreinsic valuee of common stock if future
cashflows are not known.
To find vcalue of common stock we must make a few
assumptions

If its going concern then is it growing at a constant rate or not.If

its not going concern,we find bookvalue/liquidation value

Going concern is divided into 2 parts

1. Constant growth
2. No growth
Constant growth method: we assume that if company is
growing constantly , if it is then divident must grow constantly.

Example 2:

Example 3:
No growth method:
If there is no growth then dividend will remain same, so
this is exact same case as prefered share, so we will use
prefered share formula

Ds=same dividend
NON going concern:

Book value:

Sell all assets , from the money received, pay of all

liabilities + prefred share.
The value remaining is divided by common stocks
This will be book value.

So Book value is value per share as it is calculated from

accounting books

The value of assets will be atttained throughh bbalalnce

shee

Limitation of book value:

The value of assests in books are historical values and
they are not current values so its very dangerous
method, to counter this we use liquidation method
Liquidation method:

Liquidation value=