MODULE - IV: Security pricing: Factors influencing valuation, Constant growth modal, Equity valuation, Dividend capitalization, Earnings capitalization, use of P/E ratio, Security pricing model. Securities valuations: Valuation of fixed income instruments and equities, Calculation of return on yield, Intrinsic value, Mathematics of financial evaluation, discounting, compounding, annuities, present value, and yield calculations. (Simple problems only)
Fundamental Analysis It is the analysis of investment based on the Company analysis (Balancesheet, profitability, sales,production,market share,) Economic analysis (Interest rate,rupee value,politics,inflation) Industry analysis (Production,prices,industry cycle,prospectus)
Technical Analysis It is the analysis of investment based on the Techinical charts ( 52 week\life time low/high PE ration, Book value ratio, market capitalisation) Graphs (Share vs Sensex\Nifty, price graph, sales, profitability) Moving averages ( 30days\1year) Trend analysis (Q factor)
Equity Valuation Equity valuation, Dividend capitalization, Constant growth modal, Security pricing model. Earnings capitalization, use of P/E ratio,
Equity Valuation Factors influencing Equity Valuation is Earnings per share Book value Prospectus of expansion Future earning potential Bonus, rights issues Stock splits etc.
Equity Valuation Conceptually four types of valuation models are practiced Book value\ Intrinsic value Liquidating value, Replacement value
Book Value of Shares Book Value is also called as Net Asset Value per share. It indicates the assets backing per share of the company. The ratio can be computed as follows: Book Value = Paid-up Equity Capital + Reserves & Surplus - Fictitious Assets ----------------------------------------------------------------------- Number of Equity Shares Outstanding Book Value can be regarded as the liquidation value of the share. In case the company is liquidated immediately, the book value is the amount likely to be available per share (unless all the assets and liabilities are not stated at their realizable value in the balance sheet - which is often the case.
Mathematics of financial evaluation Yield calculations Compounding, Present value Discounting, Annuities.
Constant Growth Modal For equity securities, the market price depends upon the discounted future dividends or earnings flow In this model dividend flows are assumed to be constant and the rate of growth of earnings fixed The discount rate is subjective and is assumed to be specific rate, such as risk free market rate. D Price of securities = -------------- K - G Where D= dividends K= discount rate G=growth rate
Financial arithmetic's Investments are made on the basis of the sound financial arithmetic's like yield on investment.
Yield on Bonds and fixed income securities Yield is the return on invesment calculated on principal invested and the term of holdings Generally yield is calculated as follows Total Return Yield = -------------------- Χ 100 Principal Invested
Yield for more than one year is computed as follows. n P= s Χ (1+I) Where P = Compound value S = Principal i = interest n= number of years
Problems on yeild calculations Face value of the bond Rs.100 Issue price Rs.90 Coupon rate 12% Duration – 1 year Calculate yield on investment
Solution Total Return Yield = -------------------- Χ 100 Principal Invested Yield = 12 ----- Χ 100 = 13.3% 90