Anticipated return 

(or expected gain) is the weighted-average outcome in gambling, probability

theory, economics or finance.

It is the average of a probability distribution of possible returns, calculated by using the following formula:

E(R)= Sum: probability (in scenario i) * the return (in scenario i)

How do you calculate the average of a probability distribution? As denoted by the above formula, simply take the
probability of each possible return outcome and multiply it by the return outcome itself. For example, if you knew a
given investment had a 50% chance of earning a 10% return, a 25% chance of earning 20% and a 25% chance of
earning -10%, the expected return would be equal to 7.5%:

= (0.5) (0.1) + (0.25) (0.2) + (0.25) (-0.1) = 0.075 = 7.5%

The average of a probability distribution of possible returns, calculated by using the following formula:

How do you calculate the average of a probability distribution? As denoted by the above formula, simply take the
probability of each possible return outcome and multiply it by the return outcome itself. For example, if you knew a
given investment had a 50% chance of earning a 10% return, a 25% chance of earning 20% and a 25% chance of
earning -10%, the expected return would be equal to 7.5%:

 = (0.5) (0.1) + (0.25) (0.2) + (0.25) (-0.1)

= 0.075
= 7.5% 

Although this is what you expect the return to be, there is no guarantee that it will be the actual return.
Present Value / Rate of Return

Present Value is like Future Value in reverse: you assume you already know the future value of your
investment, and want to know what your starting principal will have to be in order to reach your goal
in the desired amount of time.

The formula for present value is simple; just take the formula for future value and solve for starting
principal:

1. PV   =   FV / (1 + r)Y

(We're now writing PV, for "present value", where we were writing P before. This is sort of the convention.
It's still the same quantity: it's the principal you start out with.)

Sometimes people like to assume that they know both the future value and the present value, and they
want to find the interest rate required to make it happen. Again the formula is simple: solve the future
value formula for r:

2. r   =   (FV / PV)1 / Y  -  1

The interest rate is often called the "discount rate" when it's the thing you're solving for, and you're
assuming that the future value is a given. It's also known as the "internal rate of return", the "equivalent
rate of return", or the "CAGR" (for "compound annual growth rate").

Solving for either the present value or the interest rate may seem like a pretty backwards way of doing
things, but these are very useful techniques. They're especially nice for comparing all kinds of different
strange investments, by making them all look like ordinary compound interest problems. For example:

Example:   Suppose you have $1000 to invest, and two characters from down at the barbershop have
offered to cut you in on their private money-making schemes. Peter promises to triple your money in five
years. Warren says he'll quadruple your money inseven years. Assuming that you are a big enough twit to
believe either one of these mendacious scoundrels, which is the better deal?

To find the answer, just use equation 2 (to get the rate of return for both investments.

  Peter Warren
PV $1000 $1000
FV $3000 $4000
Y 5 7
r 24.57% 21.90%

So Peter gets your dough.

CONSTANT GROWTH MODEL

 Po= D(1+g)+ D(1+g)2+ D(1+g)3+….+ D(1+g)N
1+r (1+r)2 (1+r)3+…+ (1+r)n

Po D1
=
r-g
Po=present value of stock
r = Required rate if retuen
g = The growth rate
D1= next year dividend

Two stage growth model

n D0(1+gs)t + DN+1 x 1
Po = ∑ (1+rs)t (rs-gn) (1+rs)N
t=1

D0 =Divident of the previous period

gs= Above normal growth
gn= Noraml growth
rs = required rate of return
N= peroid of above normal growth

THE tHREE phase model

B
t
A D0(1+ga) + ∑ D0-1(1+gb)t + D B (1+gn)
∑
Po = (1+rs)t t=1+1 (1+r)t r- gn(1+r) B

t=1

D0 =Divident of Next year

ga= The perod ‘A’ groth rate
gb= The perod ‘B’ groth rate
gn=The growth rate in the thrid phase
D B=the dividend at the beginning of thr third phase

Valution through P/E ration

P = D
r-g

P/E= d/e .
r-ROE(1-d/e)