07 The Valuation of Security

Course Name: Principles of Finance
Chapter 5: The Security Valuation
TABLE OF CONTENTS
LEARNING OBJECTIVES ................................................................................... 2
ABSTRACT .......................................................................................................... 2
6.1 INTRODUCTION ............................................................................................ 3
6.2 BOND ............................................................................................................. 4
6.2.1 Key Features of Bond .............................................................................................. 4
6.2.2 Factors That Affect The Value of Bond ................................................................. 6

6.3 BOND VALUATION ..................................................................................... 11
6.3.1 Yield to Maturity.................................................................................................... 11
6.3.2 Yield to Call (YTC) ................................................................................................ 12
6.3.3 Current Yield ......................................................................................................... 13

6.4 PREFERRED STOCK .................................................................................. 15
6.5 PREFERRED STOCK VALUATION ............................................................ 17
6.6 COMMON STOCK........................................................................................ 18
6.7 COMMON STOCK VALUATION .................................................................. 19
6.7.1 Constant Growth .................................................................................................... 19
6.7.2 Zero Growth ........................................................................................................... 20

6.8 STOCK MARKET EQUILIBRIUM ................................................................ 21
ADDITIONAL MATERIALS ................................................................................ 23
QUESTIONS ....................................................................................................... 23
EXERCISES ON BOND VALUATION ...... ERROR! BOOKMARK NOT DEFINED.
EXERCISES ON STOCK VALUATION .... ERROR! BOOKMARK NOT DEFINED.
Page 1 of 23
LEARNING OBJECTIVES
At the end of this chapter, you will be able to:
• Explain and compute different valuation methods for bonds and shares
• Explain the key characteristics of securities.
ABSTRACT
This chapter looks at the different types of securities and that is bond and shares. The
characteristics of each type of securities are explained. Different valuation methods are discussed
and computational examples are shown.
Page 2 of 23
6.1 INTRODUCTION
Major securities that are traded in the capital market include bonds and stocks. One of the most
important types of securities to firms or investors is bond. Bond is a long-term contract used by
business and government to raise large sums of money. The holders of the bonds are promised
to make payments of interest and principal on a specific date. Stock, on the other hand, is a
certificate informing the holder the number of shares the holder owns in a company. The
certificate entitles the holder a profit sharing in the business, payable in the form of dividends.
There are two types of stock; preferred stock and common stock.
Page 3 of 23
6.2 BOND
One of the factors that make bonds appealing is that they pay a set amount of interest on a
regular basis. It also can provide investors with two kinds of return: current income (coupon
payments) and capital gains. Basically, there are four main types of bonds: treasury bonds,
corporate bonds, municipal bonds, and foreign bonds as shown in Figure 1.
Figure 1: Types of Bonds
Although all bonds have some common characteristics, they do not always have the same
contractual provision features. These differences affect the values and risk of the bonds. There
are four key features of a bond: par value, coupon interest rate, maturity date, and call provision.
The value of bond depends on three factors: (1) Market interest rate, (2) Terms of the contract,
and (3) Default risk.
6.2.1 Key Features of Bond

There are four key features of bond, which are, par value, coupon interest rate, maturity date and
call provision.
Par Value
Par value is the amount owed to the issuer of the bond to the bondholder, and it is usually in
multiples of RM1000.It is also called face value.
Page 4 of 23
Coupon Interest Rate

A coupon is a voucher attached to a bond. The interest earned annually on the bond for a period
of time is called coupon interest rate. The coupon rate can be either fixed (coupon bond) or
variable.
Most bonds no longer have actual coupons; rather the interest is deposited to the bondholders
account or it is left to accumulate.
However, the coupon rate is either fixed (coupon bond) or variable.
Some bonds have zero coupons, called zero coupon bonds, are bonds that do not pay coupons
at all. However, these types of bonds are issued at a substantial discount below the par values.
Thus, it provides capital gain rather than interest income.
Floating rate bonds are bonds where the coupon payments vary over time with shifts in the
general level of interest rates.
Maturity Date
Maturity date is the date on which the last payment is due. Most bonds have original maturities
that are the maturity at the time the bond is issued, normally from 10 to 40 years. However, any
maturity date, even 100 years, is legally allowed.
Call Provision
Call provision is a feature in the bond that gives the issuing corporation the right to call the bond
for redemption before the maturity date. Issuer can refund if interest rates decline. The call
amount to be paid to the bondholder is usually greater than the par value of the bond. This is
known as a call premium.
Bonds are said to have call protection when deferred call occurs, that is bonds are not callable
until several years after they are issued.
In general, callable bonds pay higher coupons than standard coupon bonds to compensate for
the fact that the issuer reserves the right to call the bond back.
Apart from the above four key features of a bond, there are also several other features, as
explained below.
• Sinking fund
Sinking fund is a provision on bonds that requires the issuer to retire a portion of the bond
issue each year.
The idea of having sinking fund feature is to protect bondholder by ensuring that an issue
is retired in an orderly fashion. Company who fails to meet the sinking fund requirement
causes the bond to be thrown into default and hence force the company into bankruptcy.
Sinking fund feature on bonds can be done in two ways:
Page 5 of 23
1. Using the least-cost method where a percentage of the bonds are called for redemption
each year at par value by numbering the bonds serially. Those called bonds for
redemption are terminated.
2. Buy the required number of bonds on the open market.
Bonds with sinking fund are regarded as being safer than those without sinking fund
provision, because it has lower coupon rates.
• Convertible bond
Bonds with convertible provision allow the bond to be exchanged into common stock, at a
fixed price and at the option of the bondholder. Convertible bonds have lower coupon
rate than non-convertible bonds. Thus, offer investors capital gain.
• Warrant
Like convertible bonds, bonds with warrant provision give options to the bondholder to
buy common stock at certain price. Therefore, it offers lower coupon rate.
• Income bond
Income bonds are bonds where payments of interest are required only when earnings are
available for the payment. It is commonly issued by reorganization of a failed organization
or failing firm.
• Indexed or Purchasing Power Bond

Indexed bonds are bonds that have interest payments based on inflation index. It is
designed to protect the bondholder from inflation.
6.2.2 Factors That Affect The Value of Bond

There are three factors that affect the value of a bond, which are:
• Market interest rate

• Terms of the contract
• Default risk
Market Interest Rate

The bond that just been issued is known as new issue. Once the bond has been on the market
for a while, it is classified as an outstanding bond, also known as seasoned issue. Newly issued
bonds generally sell very close to par, but the prices of outstanding bonds vary widely from par.
The market for newly issued stocks is referred to as the primary market. After the bond or stock
has been issued, investors can sell their bonds at any time until maturity. The market where
bonds are bought and sold (exchanged or traded) among investors is called the secondary
market.
Page 6 of 23
Figure 2: Changes in Market Interest Rate
Based on the figure above:
• When market interest rates rise, newly issued bonds pays a higher coupon rate than the
previous bonds. Therefore, investing in a newly issued bond is more attractive. The value
of the "old" bond falls because of the relatively low coupon rate.
• When market interest rates fall, the newly issued bonds pay a lower coupon rate than the
previous bonds. Bonds that were issued at a higher level of market interest rates are
therefore more attractive than newly issued bonds. The value of "old" bonds increases.
Thus, the higher the market interest rates, the less valuable the bond, and vise versa.
As mentioned above, an increase in interest rate will hurt bondholders because it will lead to a
decline in the value of a bond portfolio. A decrease in interest rate will also hurt the bondholders
because it will result to reduction in their income. This is known as reinvestment rate risk. For
example, consider a retiree who has a portfolio of bonds and lives off the income they produce.
The bonds, an average, have a coupon rate of 10 percent. Now suppose that interest rates
decline to 5 percent. Many of the bonds will be called, and as calls occur, the bondholders will
have to replace 10 percent bonds with 5 percent bonds. Even bonds that are not callable will
mature, and when they do, they will be replaced with lower-yielding bonds. Thus, our retiree will
suffer a reduction of income.
Take note that interest rate risk relates to the value of the bonds in a portfolio, while reinvestment
rate of risk relates to the income the portfolio produces.
Terms of the Contract

Some bonds have common characteristics but they usually do not have the same contractual
features such as the coupon rate, maturity date and coupon payment period.
Page 7 of 23
a. Coupon rate
Higher coupon bond has more value for an investor than the lower coupon bond and
should be more expensive than the lower coupon bond. However, if both bonds have the
same price you would prefer to buy the one that gives you the higher coupons.
When rate of return, kd higher than coupon rate, the bond is said sell at discount. When
this occur, the price of bonds will continue to rise, interest yield will always be positive
(grows smaller) and capital gain yield will always be positive as well.
Figure 3: Formula for Yield
However, bond is said sell at premium when rate of returns smaller than the coupon rate.
Therefore, price of bonds will continue to fall, interest yield will always be positive (grow
bigger) and capital gain yield will always be negative.
The higher the coupon rate, the more valuable the bond.
Figure 4: Time Path of The Value
Page 8 of 23
b. Maturity date
Assume that you have two bonds that are similar in all respects except for the maturity
date. Which bond has more value? The answer depends on how high the market interest
rate is in comparison to the coupon rate.
o If the market interest rate were higher than the coupon rate, you would prefer to
receive the face value back quickly, in order to reinvest it at a better rate. In this case,
the shorter the time to maturity, the better.
o Conversely, if the market interest rate is lower than the coupon rate, the bond that
has the most coupon payments has higher value.
Default Risk
Issuer means the possibility of the bond issuer to pay back the principal and interest, called
default risk. If the issuer defaults, investors receive less than the promised return on the bond,
and vise versa. Therefore, investors need to value a bond's default risk before making a
purchase.
• If the default risk premium of a bond is high, the higher the bond's yield to maturity. The
default risk on treasury securities is zero, but default risk can be substantial for corporate
and municipal bonds.
• If both bonds were the same price you would choose the issuer in whom you have the
greatest confidence in debt repayment ability. For the same return, you want to minimize
your risk.
Another way to assess a bond's default risk is through its credit ranking, as shown below.
Figure 5: Assessing Bond’s Default Risk Through Credit Ranking
The triple-A and double-A bonds are extremely safe bonds.
Single-A and triple-B are also strong enough bonds, called investment grade bonds. They are the
lowest rated bonds that many banks and other institutional investors are permitted by law to hold.
Double-B and lower grade bonds are called Junk bonds.
Page 9 of 23
The higher the credit ranking, the more valuable the bond. The lower the credit ranking, the
higher the coupon rate needs to be in order to compensate for the risk.
Bond with high-risk and high-yields are called junk bonds. These bonds have a significant
probability of going into default.
Page 10 of 23
6.3 BOND VALUATION

The value of a bond is simply the present value of the contractual payments the issuer is
obligated to make from the current time until it matures. The general equation to find the value of
a bond is:
or
Figure 6: Equation to find Value of Bond
Figure 7: Equation to find Value of Bond
kd = bond's market interest rate

N = number of years before bond's mature.
INT = amount of interest paid each year (coupon rate X par value)
M = the par, or maturity value of the bond.
PVIFA = present value of interest factor annuity
PVIF = present value of interest factor.
Unlike the coupon interest rate, which is fixed, the bond's yield varies depending on current
market condition. In this situation, bond's yields can be valued in three situations:
1. Yield to maturity,
2. Yield to call, and
3. Current yield.
6.3.1 Yield to Maturity

When you bought and held a bond to its maturity date, the interest rate that you would earn on
your investment is called yield to maturity (YTM). YTM can also be viewed as the bond's
promised rate of return.
For example, on January 1, 1998, Deltacom Corporation Berhad issues a 10 percent coupon
interest rate, 10-year bond with a RM1, 000 par value that pays interest annually, at an issuing
price of RM1, 080. Find the yield to maturity for this bond.
Page 11 of 23
VB = INT(PVIFAkd, N) + M(PVIFkd, N)
RM1, 080 = RM100(PVIFAkd, 10) + RM1, 000(PVIFkd,10)
Using trial and error approach, recall that the lower the discount rate (k d), the higher the present
value (VB), and the higher the discount rate, the lower the present value. If 10% coupon rate
would result RM1, 000 present value, then for RM1, 080 the value of kd is less than 10%.
Trying kd = 9%
RM 100(PVIFA9%, 10) + RM1, 000(PVIF9%,10)

= RM 100 (6.418) + RM1,000(0.422)
= RM1, 063.80
Since 9% return is not low enough, lets try 8%:
RM 100(PVIFA8%, 10) + RM1, 000(PVIF8%,10)

= RM 100(6.710) + RM1, 000(0.463)
= RM1, 134.00
Because the value of RM1, 134 at 8% return is higher than RM1, 080 and the RM1, 063.80 value
at 9% return is lower than RM1, 080 the bond's YTM must be between 8% and 9%. The YTM can
be estimated by using the internal rate of return (IRR) approach.
IRR = A + [ a X (B - A)]
(a-b)
where,
A: one of the discount rate

B: the other discount rate
a: NPV at discount rate A
b: NPV at discount rate B
Asume that A = 8%
B = 9%
a = RM1,134 - RM1,080 = +RM54
b = RM1,063.80 - RM1 ,080 = - RM16.2
Thus, YTM = 8%+ [ 54 X (9% - 8%)]
54-(-16.2)
= 8.77%
6.3.2 Yield to Call (YTC)

Some bonds have callable provision that means that when you purchase a callable bond and the
company calls it, you would not have the option to hold it until its maturity date. Normally, a bond
will be called when the current interest rate is below than an outstanding coupon rate. Then the
expected return rate of the bond is called yield to call (YTC).
For example, Deltacom Corporation Berhad issued bonds with a RM1, 000 par value and 10
percent coupon rate. These bonds were called at a price of RM1, 100 when the 10 percent
Page 12 of 23
interest rate fell to 5 percent. The fallen in interest rate had risen the price of the bond to RM1,
494.93. The bond's YTC can be calculated using the formula below:
Figure 8: Formula to Calculate Bond's YTC
RM1,494.93 = RM100 + RM1,100

(1+ 5%)10 (1+ 5%)10
Using trial and error approach, we first try kd = 4%
RM100(PVIFA4%, 10) + RM1, 100(PVIF4%,10)

= RM100 (8.1109) + RM1,100(0.6756)
= RM1, 554.25
Lets try another rate, 5%:
RM100(PVIFA5%, 10) + RM1, 100(PVIF5%,10)

= RM100 (7.7217) + RM1,100(0.6139)
= RM1, 447.46
Substituting the value into internal rate of return (IRR) approach,
IRR = A + [a X (B - A)]
(a-b)
Assume that: A = 4%
B = 5%
a = RM1,554.25 - RM1,080 = + RM59.32
b = RM1 ,447.46 - RM1 ,080 = - RM47.47
Thus, YTC = 4%+ [ 59.32 X (5% - 4%)]
59.32-(-47.47)
= 4.56%
6.3.3 Current Yield

Unlike the yield to maturity, the current yield does not represent the return that investors should
expect to receive from holding the bond. The current yield only represents the amount of cash
income that a bond will generate in the specified year. This is obtained by dividing the current
interest payment on a bond with the bond's current price.
Figure 9: Formula to Calculate Current Yield
Page 13 of 23
However, current yield is not an accurate measure of the bond's total expected return because it
does not take into account of capital gains or losses when bond's is held until maturity.
Page 14 of 23
6.4 PREFERRED STOCK

Another method of raising money is through selling stocks. A stock is a security that represents
an equity interest or ownership in a business. Stocks are traded in an open market. Stock market
transactions can be classified into three distinct types, as shown in Figure 10.
Figure 10: Types of Stock Market Transaction
Basically, there are two types of stock, common stock and preferred stock. Both common and
preferred stock represent an ownership interest in a publicly held corporation. They represent a
legal claim on a company's assets and are traded by investors.
Preferred stock is a special form of ownership having a fixed periodic dividend that must be paid
prior to payment of any common stock dividends. Preferred stocks too have their own features,
which are:
• Restrictive covenants
Stocks with restrictive covenants provision are aimed to ensure the existence of the firm,
and most important, regular payment of the stated dividend.
• Accumulation
Most preferred stock is cumulative that is all dividends in arrears must be paid along with
the current dividend prior to the payment of dividends do common stockholders. If the
preferred stock is non-cumulative, the unpaid dividends no not cumulate. In this case,
only current dividend must be paid prior to paying dividends to common stockholders.
• Participation
Most preferred stocks are nonparticipating, which means preferred stockholders receive
only the specified dividend payments. The participating preferred stocks are only included
when the firm considers they needed funds badly.
• Callable
Preferred stock is generally callable. This means the issuer can retire outstanding stock
within certain period of time at a specified price, normally above the initial issuance price.
Preferred stocks can only be called after a few years since the issuance date.
Page 15 of 23
• Conversion
Preferred stocks usually contains conversion feature. It allows preferred stockholders to
change each share into a stated number of shares on common stock.
The risk of the stockholder is very different from the bondholder. The major concerns for the
bondholder are the degree of solvency of the borrower and changes in interest rates. The
stockholders however, more concern about dividend earned and capital gained.
Page 16 of 23
6.5 PREFERRED STOCK VALUATION

As dividend of preferred stocks is fixed, it has no maturity date. This is called perpetuity. Thus, to
value preferred stock, we use the formula shown below.
Figure 11: Formula for Value Preferred Stock
Below is the sample calculation on valuation of preferred stock.
Assume that Deltacom Corporation Berhad paid a fixed dividend of RM1.15 per stock. Its stock
has a required rate of return, kps , of 13.4 percent.
Substituting the values equation (6.3):
Vps = DPS
kPS
= 1.15
13.4%
= RM8.58
Page 17 of 23
6.6 COMMON STOCK
People typically buy common stock expecting to earn dividends plus a capital gain. Common
stocks can either be held privately or publicly. Firms that are small and their common stocks are
not actively traded; owned by only a few people are called privately owned or closely held
corporations. However, the companies are said publicly owned corporations when their stocks
are owned by a large number of stockholders. Both stockholders have a control over the firm's
operation.
Other rights or privileges owned by the common stockholders are:
• Proxy - a legal document giving one person the authority to act for another. In business,
it generally refers to the instructions given by a shareholder with regard to voting shares
of common stock.
• Proxy fight - an attempt by a person or group to gain control of a firm by getting
stockholders to grant that person or group the authority to vote their shares to replace the
current management.
• Takeover - An action whereby a person or group succeeds in ejecting a firm's
management and taking control of a company.
• Preemptive right - right of the current shareholders to purchase any new shares issued
in proportion to their current holdings. It is usually stated in every stockholders grant,
however, sometimes it can be excluded.
Figure 12 below shows the differences between preferred stock and common stock.
Figure 12: The Differences Between Preferred Stock and Common Stock
Page 18 of 23
6.7 COMMON STOCK VALUATION

The basic valuation of common stock is similar to the valuation of bond. The general formula to
calculate the value of a stock is:
Figure 13: Formula to Calculate Value of Stock
Po = value of stock
Dt = dividend expected at the end of year t
ks = required rate of return on the stock
The time pattern of dividend not necessarily constant. It can fluctuate randomly or even zero for
several years. Therefore, valuation of common stock can be classified into three approaches: (1)
Constant growth, (2) zero growth, or (3) non-constant growth stock.
6.7.1 Constant Growth

For many companies, the stream of dividends is expected to grow at a constant rate. Constant
growth is also known as Gordon Model, who developed and popularized the model.
This model is only appropriate and meaningful for mature companies with stable history of growth
and in a situation where the required rate of return, k s, is greater than the growth rate, g.
The estimated dividend to be received can be calculated using the formula below.
Figure 14: Formula to Calculate Estimated Dividend to be Received
To estimate dividend to be received at year-end, the formula below is used:
Figure 15: Formula to Calculate Estimated Dividend to be Received at Year-End
Page 19 of 23
where,
Dt = dividend expected at the end of year t

D0 = the most recent dividend (already been paid)
g = expected growth rate
t = number of years
For example, Deltacom Corporation Berhad just paid a dividend of RM1.15. Its stock has a
required rate of return of 13.4 percent, and investors expect the dividend to grow at a constant 8
percent rate in the future. Calculate the value of the constant growth stock.
D0 = RM1.15, ks = 13.4% and g = 8%
Using formula (6.6) the current value of this stock is:
P0 = RM1.15(1 + 8%)
0.134 - 0.08
= RM23.00
6.7.2 Zero Growth

Zero growth stock valuation is suitable for companies where the dividend is expected to remain
constant over time or to be in perpetuity. This means the growth rate is equal to 0, g = 0.
The formula to value a zero growth stock is:
Figure 16: Formula to Value Zero Growth
For example, Deltacom Corporation Berhad paid a dividend of RM1.15. Its stock has a required
rate of return of 13.4 percent and the dividends are not expected to grow at all in the future.
Calculate the value of zero growth stock.
D0 = RM1.15, ks = 13.4%, and g = 0
The value of this stock is:
P0 = D
ks
= RM1.15
13.4%
= RM8.58
Page 20 of 23
6.8 STOCK MARKET EQUILIBRIUM
It is actually almost impossible to get an accurate forecast of the most profitable stock. However,
by using stock market equilibrium diagram we can at least estimate and buy stocks that give
more than the minimum return we want. The market equilibrium can be shown graphically using
the Security Market Line (SML).
SML is actually based on efficient market assumption which there are many small investors, each
having the same information and expectations (high returns and lower risk) with respect to
securities.
Figure 17: Market Equilibrium
Investors believe that stock prices react rapidly and objectively to new information available. This
theory is called Efficient Market Hypothesis (EMH) theory.
EMH theory states that:
1. Stocks are always in equilibrium and

2. It is impossible for an investor to consistently beat the market.
There are three forms or level of information that lead price of stock to change, which are:
• Weak-form efficiency
• Semi strong-form efficiency
• Strong-form efficiency
Weak-form Efficiency
Where all information on past or history price movements fully reflected or incorporated current
market price. If this fact holds, trend analysis is useless for predicting future price changes and
will not allow an investor to earn abnormal returns.
Page 21 of 23
Semi strong-form Efficiency

When current market prices reflect all publicly available information. If this were true, firm’s
financial statements are of no help in forecasting future price movements because market price
would have adjusted to any good or bad news contained in such reports back when the news
came out. Will also not allow investors to earn abnormal returns.
Strong-form Efficiency
The strong-form EMH stipulates that private or public (even insider information) information too, is
quickly incorporated by market prices and therefore cannot be used to reap abnormal trading
profits.
Besides that, most investors also belief that the marginal investors are the people who determine
the actual stock's price because their action in the stock trading reflects the current investors
trading behavior.
Page 22 of 23
ADDITIONAL MATERIALS
Hyperlinks
• The Efficient Market Hypothesis & The Random Walk Theory

http://www.investorhome.com/emh.htm
• Stock Basics: Introduction

http://www.investopedia.com/university/stocks/
• Bond Basics: Introduction

http://www.investopedia.com/university/bonds/
• Bond Valuation
http://www.teachmefinance.com/bondvaluation.html
• Stock Valuation
http://www.teachmefinance.com/stockvaluation.html
• Interactive Tutorials on Corporate Finance

http://www-ec.njit.edu/%7Emathis/interactive/
QUESTIONS
Refer to the EQ.
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Course Name: Principles of Finance

Chapter 5: The Security Valuation

6.2.1 Key Features of Bond .............................................................................................. 4

6.2.2 Factors That Affect The Value of Bond ................................................................. 6

6.3.1 Yield to Maturity.................................................................................................... 11

6.3.2 Yield to Call (YTC) ................................................................................................ 12

6.3.3 Current Yield ......................................................................................................... 13

6.7.1 Constant Growth .................................................................................................... 19

6.7.2 Zero Growth ........................................................................................................... 20

Figure 1: Types of Bonds

6.2.1 Key Features of Bond

Coupon Interest Rate

However, the coupon rate is either fixed (coupon bond) or variable.

2. Buy the required number of bonds on the open market.

• Indexed or Purchasing Power Bond

6.2.2 Factors That Affect The Value of Bond

• Market interest rate

Market Interest Rate

Figure 2: Changes in Market Interest Rate

Based on the figure above:

Terms of the Contract

Figure 3: Formula for Yield

Figure 4: Time Path of The Value

Figure 5: Assessing Bond’s Default Risk Through Credit Ranking

The triple-A and double-A bonds are extremely safe bonds.

Double-B and lower grade bonds are called Junk bonds.

6.3 BOND VALUATION

Figure 7: Equation to find Value of Bond

kd = bond's market interest rate

6.3.1 Yield to Maturity

RM1, 080 = RM100(PVIFAkd, 10) + RM1, 000(PVIFkd,10)

RM 100(PVIFA9%, 10) + RM1, 000(PVIF9%,10)

Since 9% return is not low enough, lets try 8%:

RM 100(PVIFA8%, 10) + RM1, 000(PVIF8%,10)

A: one of the discount rate

6.3.2 Yield to Call (YTC)

Figure 8: Formula to Calculate Bond's YTC

RM1,494.93 = RM100 + RM1,100

Using trial and error approach, we first try kd = 4%

RM100(PVIFA4%, 10) + RM1, 100(PVIF4%,10)

Lets try another rate, 5%:

RM100(PVIFA5%, 10) + RM1, 100(PVIF5%,10)

Substituting the value into internal rate of return (IRR) approach,

6.3.3 Current Yield

Figure 9: Formula to Calculate Current Yield

6.4 PREFERRED STOCK

Figure 10: Types of Stock Market Transaction

6.5 PREFERRED STOCK VALUATION

Figure 11: Formula for Value Preferred Stock

Below is the sample calculation on valuation of preferred stock.

Substituting the values equation (6.3):

6.6 COMMON STOCK

Other rights or privileges owned by the common stockholders are:

6.7 COMMON STOCK VALUATION

Figure 13: Formula to Calculate Value of Stock

6.7.1 Constant Growth

Figure 14: Formula to Calculate Estimated Dividend to be Received