VALUATION OF

SECURITIES

BY:
S.S.R. KRISHNA
FACULTY ( FINANCE )
( ICFAI )
 VALUATION OF
SECURITIES

OBJECTIVES:
 valuation of bonds
 The different
techniques used in
valuation of equities.
 Introduction:
The finance
manager should valuate the
securities of his firm in order
to check whether the
securities are undervalued or
overvalued in the stock
market and take necessary
measures if they are
undervalued.
The valuation
 Process while making
judgements
 The true picture of the
company over a representative
time span
 An estimation of current normal
earning power and dividend
payout
 Estimate of future profitability
and growth and reliability of
such expectations.
 Translation of all these
 Concept of valuation:
The securities
are valued taking into
account the cash flows from
the assets and an
appropriate discount rate.
The discount rate is based
upon the riskiness of the
asset; higher the risk higher
would be the discount rate.
 The value of security is
generally understood as market
value of the security value can
be of different types
 BOOK VALUE : it is the
historical cost of the asset
minus the accumulated
depreciation
 REPLACEMENT VALUE: The
value of the asset which is to be
  LIQUIDATION VALUE: After
liquidating the company the
value at which the asset is sold
is said to be liquidation value
 GOING CONCERN VALUE: If the
company is not liquidated but is
sold as a going concern then the
assets are said to be valued at
going concern value.
 MARKET VALUE: The current
value of the asset at which it is
being sold or purchased in MKT
 Valuation of bonds:
Bonds are the
instruments which are mainly
used for raising funds for a long
term. Key term related to bonds
are
 FACE VALUE: It is also known as
par value and is stated on the
face of the bond. It represents
the amount of borrowing by the
company which it specifies to
COUPON RATE : coupon rate is a
specific rate of interest on the par
value of the bond. The Product of
coupon rate and the par value is
the interest rate which is paid to
the bond holder.
REDEMPTION VALUE : Usually on
the date of maturity, the bonds are
redeemed. Redemption can be at
par value, premium, or discount.
The value at which the shares are
redeemed is said to be the
YIELD TO MATURITY : The bond
which is held till its maturity date
and the return which is earned till
the date of maturity is said to be
yield to maturity
 CURRENT YIELD: This yield gives
information regarding the cash
flows that would be generated in
the current market from a
particular bond. If annual interest
of the bond is divided by the
current market price, we get
 BASIC BOND VALUATION

ct f
V0(or P0) = n€ +
t (1 + k )n
t=1 (1 + kd) d

(OR) V0 = I(PVIFA Kd,n) +

 Components of bond
 value
V0 = Intrinsic value of the
bond
P0 = Present value of the
bond
I = Annual interest
payable on the bond
F = Principal amount
(par value) repayable at the
maturity time
 BOND VALUE THEOREMS

I. Relationship between
the required rate of
return and the coupon
rate.
II. Number of years to
maturity
 EQUITY
VALUATION

RATIO APPROACH
DIVIDEND CAPITALIZATION
APPROACH
LIQUIDATION
BOOK VALUE VALUE

P/E RATIO
CONSTANT VARIABLE
CONSTANT GROWTH IN GROWTH IN
DIVIDENDS DIVIDEND DIVIDEND