Valuation of Shares:

The value of every share is printed in front of the shares. Such a value is
called as par value or face value of shares. The face value is assigned by the
promoters of Joint Stock Company and is given in the memorandum of
association. Except the face value, it has also get market value on stock
exchange market which may be differ from face value. The market value of a
share is determined by the demand and supply. Such a value is affected by
the action and opinions of investors and their fear, guess, investment policy
etc. Hence, the market price does not reflect the true value of shares and
requires a proper valuation of shares. Specially, in the case of private limited
company the shares of such a company are not freely purchased and sold to
the public. In that case, the valuation becomes absolutely necessary.
The value of shares can be determined in different ways. It can be valued
either by taking the earning of a company or net assets that comprise the
company. The choice is governed by the reasons for investment.

Dividend Growth Model:

The dividend growth model (DGM) is a method of valuing a company's stock
price based on the theory that its stock is worth the sum of all of its future
dividend payments, discounted back to their present value. In other words, it
is used to value stocks based on the net present value of the future
dividends. The dividend growth model is also known as the Dividend discount
model, the Dividend valuation model or the Gordon growth model.
The DGM is commonly expressed as a formula in two different forms:
Ke = (D1 / P0) + g
or (rearranging the formula)
P0 = D1 / (Ke - g)
Where:
P0 = ex-dividend equity value today.
D1 = expected future dividend at Time 1 period later.
Ke = cost of equity per period.
g = constant periodic rate of growth in dividend from Time 1 to infinity.

The model's assumptions are that: the dividend growth rate is constant; the
growth rate cannot equal or exceed the required rate of return; the investor's
required rate of return is both known and constant. In practice, a company's
earnings and growth rates are not known and not constant.

Capital Asset Pricing Model:

Capital asset pricing model (CAPM) was originally developed in 1952 by
Harry Markowitz and fine-tuned over a decade later by others, including
William Sharpe. CAPM describes the relationship between risk and expected
return, and it serves as a model for the pricing of risky securities. CAPM says
that the expected return of a security or a portfolio equals the rate on a risk-
free security plus a risk premium. If this expected return does not meet or
beat our required return, the investment should not be undertaken.
The commonly used formula to describe the CAPM relationship is as follows:
Re = Rf + (Rm - Rf)
Where:
Re = Required or expected return
Rf = Risk free rate of return
Rm = Market return
= Systematic risk of the security
It is important to remember that high-beta shares usually give the highest
returns. Over a long period of time, however, high beta shares are the worst
performers during market declines (bear markets). While you might receive
high returns from high beta shares, there is no guarantee that the CAPM
return is realized.