PLATFORMS OF

CAPITAL MARKET
Conventional Brokerage
Online Trading
Mutual Funds
Conventional Brokerage
• Investors buy or sell shares by opening an account with a
stockbroker.
• The broker will buy and sell shares in behalf of the
investor in exchange for payment called commissions.
• Commissions – percentage of the amount being traded.
Online Trading
• Many investors are shifting towards digital platforms to
trade shares due to the advancement of technology.
• Charges lower commission compared to conventional
brokers.
Mutual Funds
• Investment company that pools money from various
investors and invests them to different securities based
on the investment objective of the fund.
• Allows investors to diversify their portfolio since it holds
shares in different companies.
 MARKET CAPITALIZATION
• Total market value of all outstanding shares of a company.
• Important indicator in determining a size of the company.
• The formula:

Market Capitalization = Total Outstanding Shares X Prevailing

Market Price per Share
 SHARE VALUATION
• Important for investors to understand how to value
shares to be to assess reasonableness of the price being
offered to them.
• Share valuation techniques are commonly grounded in
identifying how much cash flow can be received in the
future if the investor purchases the share now.
• Value of Share = Present Value of Cash Flows
 ONE-TIME OR MULTIPLE VALUATION
••  
Applied by determining the present value of the
dividends received and the proceeds of the capital stock.
• The formula:

• Where,
V0 = the current fair value of a stock
Dn = the dividend payment in the nth period from now
Pn = the stock price in the nth period from now
r = the required return
Example:
• Juan Dela Cruz is an investment analyst. One of his clients asked
him to assess the value of an investment in 8990 Holdings, Inc.
The client expects to hold the investment for three tears and
sell it at the end of the holding period. He forecasted that 8990
Holdings, Inc. will pay dividends of Php5.00 in the first year,
Php7.50 in the second year, and Php9.20 in the third year. He
also forecasted that at the end of the holding period, the selling
price of the company’s stock would be at Php125.00 per share.
The investor expects a return of 8% on his investment. The
current stock price is Php115.00 per share. Determine the value
of the stock using multiple period valuation model.
•• Solution:
 

The value of the share at present is Php127.49, which is more than

its current selling price of Php115.00. Therefore, the stock is
currently undervalued and that the investor could take advantage of
buying the share at the present because the investor may be able to
receive a return from the spread between the current selling price
and the market value based on the share valuation technique used.
• 
Example:
Sweet Girls Company issued ordinary shares that
would yield Php8.00 per year. The stocks were purchased
at Php40.00 per share and to be sold at Php47.00 the
following year. The return required is 13%.
Solution:

The stocks are valued at Php48.67 per share.

 CONSTANT GROWTH MODEL
••  
Also known as the “Gordon Growth Model” – named
after Myron Gordon.
• Most widely-known model used in share valuation.
• The formula:

Where,
V0 = value of the stock k = required rate return
D = expected cash flow g = expected dividend growth rate
• 
Example:
Jerna Grace is looking at investing and buying shares
from Bernadette Company. Shares of Bernadette
Company earns a dividend of Php5.00 per year and will
grow by 4% starting next year. The required return for
this security is 16%. The current market value of the share
is Php40.00
Solution:

The shares are valued at Php41.67 per share.

Example:
Let's assume XYZ Company intends to pay a Php7.25
dividend per share next year and you expect this to
increase by 6% per year thereafter. Let's further assume
your required rate of return on XYZ Company stock is
14%. Currently, XYZ Company stock is trading at
Php95.00 per share. Compute for the value of the share
using constant growth model.
• 
Solution:

The shares are valued at Php90.625. Therefore, the

share is overvalued.
 COMPOUNDED ANNUAL GROWTH
RATE
•  Measures the compounded average growth for several periods covered by
the analysis.
• The formula:

Where,
CAGR = Compounded Annual Growth Rate
EE = Ending balance
BB = Beginning balance
n = number of years considered in the analysis
Example:
BK Company is looking at investing and buying shares from JL
Company. The projected dividend for 2020 is Php5.75. Based on
publicly available information, BL Company was able to gather
the following information regarding the company’s dividend data
for past 8 years. The required return on this investment is 12%.
Year Dividend per Share
2019 Php5.40
2018 Php5.28
2017 Php5.19
2016 Php4.93
2015 Php4.72
2014 Php4.38
2013 Php4.17
2012 Php4.00
•Solution:
 

The shares are valued at Php71.88 per share.

 ZERO GROWTH MODEL
••  
Assumes that dividend will be fixed and will not change
anymore in the future. Simplest approach in share
valuation.
• The formula:

Where,
V0 = value of the stock r = required return
D = expected cash flow
• 
Example:
• Thomas wants to buy 600 preference shares, Php150.00 par
value from Puregoods Company. According to his sources,
the preference shares comes with a constant dividend of
Php18.00 per share. Thomas plans to hold the shares in
long-term and has no plans of selling it in the future. His
required return on investment is 12%.
Solution:

The preference shares of Puregoods Company are valued at

Php150.00 per share.