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Valuation
Is the process to identify the of assets or investment The valuation of assets can be done by several methods:
Book Value : The value of an asset as stated in balance sheet. The market value of the asset is difference with the book value. Liquidation Value : Is the value of asset when an asset is sold Market Value : Value of asset available in the market as determined by supply and demand in the market Intrinsic Value : Is the present value of all the potential cash flow that will be obtained after discounting at the rate of return required by investor
Valuation Process
Is a process to determine the value of asset by using Time Value of Money technique Factor that influence the value of asset
Total cash flow : The value of asset depend on the total cash flow that is expected. Timing : Refer to the period of receiving the cash flow Required Rate of Return : Refer to the return that required by the investor. The higher the risk of the investment, the higher return that will be obtained.
(1 k) 2
(1 k) n
CFn n t 1 (1 k)
Bond
Is the fixed income securities that will be received interest at the fixed rate Figure below is the concept of the bond
Characteristics of Bonds
Claims on Assets and Earning : Bond holder have the priority to claim on the earning and company assets compared to preference share and ordinary share Par Value : Is the value of the bond that stated of the document. This value will be received with interest payment at the maturity date Coupon Rate : Refer to the return to bond holder Indenture : Is the contract between trustee (bond holder) and the company that issued the bond Maturity Date : Is the time that the bond will be redeem Floating Rate : The Coupon Rate may change based on the current interest rate Zero Coupon Bond : The bond sold at the lower price than the par value Embedded Bond : The bond that call back before the maturity date
Rating of Bond
Process to determine the value and grade the bond 2 rating agencies in Malaysia that is
Rating Agency Malaysia (RAM) : For LongTerm Bond, the valuation of AAA indicates a high level of credit trust compare to the AA and BBB. Malaysian Rating Corporation Berhad (MARC) : Use AAA-D grade for long-term bond and use MARC1-MARC4 for short-term bond
Types of Bonds
Mortgage Bond : Is a secured bond backed by tangible asset such as building and land. The secured value is higher than the value of bond issued Debenture : Is the long-term loan that are not secured with assets but depend on the company ability to obtain earning Have a higher risk compare to secured bond High Yield Bonds : Bond that pay interest based on the company surplus earning
Valuation of Bond
There are 3 elements that influence the valuation that is:Amount and timing of cash flow that will be received by investors Maturity date of bond Rate of return required by investor
Vb I n kb M PVIF PVIFA
= Nilai intrinsik atau harga semasa bond = Bayaran kupon = Tempoh bon sehingga matang = Kadar pulangan diperlukan = Nilai muka = Interest factor of Present Value = Interest factor of Present Value Annuity
I = (PVIFAk/2 , 2n ) M(PVIFk/2 , 2n ) 2
8 10 12
Ordinary Share
Ordinary share didnt have maturity period. It will remain forever as long as the company is still in operation Return to the shareholder in form of dividend payment The payment of dividend done after the dividend to the preference share paid
The dividend receive by the shareholders is depend on the company profit and the growth rate of the company. Growth rate (g) of the company can be measured using the below formula g = ROE x r
Where V = Present value of ordinary share D1 = Cash dividend that is expected to be received at the end of the period P1 = Price of share that is expected at the end of the period K = Required Rate of Return
Below is the formula to calculate the share if the bond have infinity period V = D1 (k g)
Preference Shares
Characteristics of Preference Share
Issuance of Several Classes of Preference Share : Every class of share have different characteristics Claim of Assets and Earning : After bond holder and before ordinary shareholders Cumulative Dividend : If there are dividend arrears, the company must pay those dividend first before the dividend paid to ordinary shareholders