8-1

CHAPTER 8
Stock Valuation

No-01

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 8-2

Key Features of a Stock

1. Par value: Face amount; paid

at maturity. Assume $1,000.

2. Coupon interest rate: Stated

interest rate. Multiply by par
to get $ of interest. Generally
fixed.
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 8-3

3. Maturity: Years until Stock

must be repaid. Declines.

4. Issue date: Date when Stock

was issued.

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 8-4

Valuation of Preferred Stock

Vp = Expected Dividend / r

R = Required rate of return

Par Value Rs.100

Rate of Dividend = 10%
Required rate of return = 12%

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 8-5

Valuation of Preferred Stock by Price

Vp = Expected Dividend / r

Vp = 10 / .12 = 83.33
If P.Stock price is 90 in the market do
not invest.
If P. stock price is 80 in the market then
invest.

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 8-6

Valuation of Preferred Stock by rate

Par Value Rs.100

Rate of Dividend = 10%
Required rate of return = 12%
If market price is 80 then invest or not
If market price is 90 then invest or not

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 8-7

Valuation of Preferred Stock by rate

Rp = Dividend Rate/ Market Value *100

= 10/80*100 = 12.50 %
invest as required return is more than 12 %
Rp = Dividend Rate/ Market Value *100
= 10/90*100 = 11.11 %
Not invest as required return is less than
12 %

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 8-8

CHAPTER 8
Valuation of common Stock

No-02

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 8-9

Valuation of Common Stock

Zero Growth
Constant Growth
Variable Growth

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 8 - 10

Valuation of Common Stock

Zero Growth
If a company paid Rs.03 dividend per
year for infinite period & required rate
of return 10%.what is the value of
stock.
Vs = Dividend / r
 = 3/0.1 = 30

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 8 - 11

Valuation of Common Stock

Constant Growth
Vs = Dividend / ( r – g )
if a company paid Rs 4 dividend per
year at growth rate 5% & required rate
of return is 13%.
Vs = Dividend / ( r – g )
= 4/ ( 0.13 -0.05) = 50

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 8 - 12

Valuation of Common Stock

Variable Growth Rate

Dividend Rs- 4
Growth
1–3 10%
4- 5 8%
6 - infinity 5%
Required rate of return 12%
What is the value of stock.
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 8 - 13

Valuation of Common Stock

Dividend
0 Didv. 0 ( 1+g) 4 ( 1+ 0.10) 4.4
 1 Didv. 1 ( 1+g) 4.4 ( 1+0.10) 4.84
 2 Didv. 2 ( 1+g) 4.84 ( 1+0.10) 5.32
 3 Didv. 3 ( 1+g) 5.32 ( 1+ 0.08) 5.75
 4 Didv. 4 ( 1+g) 5.75 ( 1+0.08) 6.21
 5 Didv. 5 / ( r-g) 6.21( 1.05)/ 0.12 -0.05 93

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 8 - 14

Valuation of Common Stock

Dividend PVIF12% Value

 4.4 0.893 3.92
 4.84 0.797 3.85
 5.32 0.712 3.79
 5.75 0.636 3.66
 6.21 0.567 3.52
 93 0.567 52.73
 71.47
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 8 - 15

Question-01

Variable Growth Rate

Dividend Rs- 5
Growth
1–3 08%
4- 5 10%
6 - infinity 07%
Required rate of return 12%
What is the value of stock.
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 8 - 16

Question-02

Par Value Rs.100

Rate of Dividend = 8%
Required rate of return = 12%
If market price is 80 invest or not
If market price is 70 invest or not

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 8 - 17

Question-03

 If a company paid Rs.05

dividend per year for infinite
period & required rate of return
12%.what is the value of stock.

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 8 - 18

Question-04

A- if a company paid Rs 6 dividend per

year at growth rate 5% & required rate of
return is 13%. What is the value of stock.
B. if a company paid Rs 5
dividend per year at growth rate
6% & required rate of return is
10%. What is the value of stock.

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 8 - 19

Question-05

Variable Growth Rate

Dividend Rs- 6
Growth
1–3 10%
4- 5 6%
6 - infinity 5%
Required rate of return 12%
What is the value of stock.
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