Concept of Valuation Valuation of Different Types of Securities Calculation Of expected Market Value

Concept of Valuation Valuation is the total market value of the securities and other long-term financing sources of the company. Value of any security, simply speaking, is the present value of all expected cash flows to be generated by the security over the relevant time period. The time period may range from one year to perpetuity.

Valuation Liquidation value versus Going Concern Value The amount of money that could be realized if an asset or a group of assets is sold separately from its operating organization The amount that the firm could be sold for as a continuing operating business. Book value versus Market Value The book value of an asset is the accounting value of the asset Market value of an asset is simply the market price at which the asset trades in the open marketplace. Market Value versus Intrinsic value What the price of a security should be if properly priced based on all factors bearing on valuation.

Valuation of Different Types of Securities Value of Bonds Value of Preferred Stock Value of Common stock

Bond: A long-term debt instrument Treasury Bonds: Bonds issued by the corporate government, sometimes referred to as government bond. Corporate Bonds: Bonds issued by corporations. Municipal Bonds: Bonds issued by state and local governments. Foreign Bonds: Bonds issued by foreign governments or by foreign corporations.

Types of Bond … Fixed-rate Bond: A bond whose interest rate ifs fixed for its entire life. Floating- Rate Bond: A bond whose interest rate fluctuates with shifts in the general level of interest rates. Original Issue Discount (OID) Bond: Any bond originally offered at a price below its par value Convertible Bond: A bond that is exchangeable at the option of the holder for the issuing firm’s common stock.

Bond Characteristics… Putable Bond: A bond with a provision that allows its investors to sell it back to the company prior to maturity at a prearranged price. Income Bond: A bond that pays interest only if it is earned. Indexed ( Purchasing Power) Bond: A bond that has interest payments based on an inflation index so as to protect the holder from inflation. Call provision: A provision in a bond contract that gives the issuer the right to redeem the bonds under specified term prior to the normal maturity date.

Key Characteristics of Bonds Face value/Par Value: the stated value of an asset. In the case of a bond the stated value is $ It generally represents the amount of money the firm borrows and promises to repay on the maturity date. Coupon rate : the stated rate of interest on a bond; the annual interest payment divided by the bond’s face value. Coupon Payment: The specified number of dollars of interest paid each year. Maturity Date: A specified date on which the par value of a bond must be repaid.

Types of Bond Perpetual Bonds Bonds with a Finite Maturity Nonzero Coupon Bonds Zero- coupon bond : a bond that pays no interest but sells as at a deep discount from its face value; it provides compensation to investors in the form of price appreciation.

Basic Bond Valuation Where C t is the annual coupon payment M is the par value of the bond k D is the required rate of return on the bond issue n is the number of years to maturity (term to maturity)

Basic bond valuation D 0 = 100 x PVA nORD factor 5% 10 yrs. + 1,000 x PV n factor 5% 10th yr. = 100 x ,000 x = Tk Example: Road king Company Ltd. issued a 10% annual coupon bond with a 10-year maturity. The par value of the bond is Tk.1,000. What is the value of the bond? The minimum required return on the bond is 5%.

Stock Valuation Preferred Stock: A type of stock that promises a fixed dividend but at the discretion of the board of directors. It has preference over common stock in the payment of dividends and claim on assets. Common stock: Securities that represent the ultimate ownership ( and risk) position in a corporation

Preferred Stock Valuation Where P 0 = present value of all contractual payments on the preferred stock per share. D = the fixed dividend per share of preferred stock. k P = the current cost of preferred stock.

Preferred stock valuation Example: Road King is paying Tk.25 per share of preferred stock dividend. Its cost preferred stock is 12%. Calculate the value of Road King’s preferred stock. Tk

Common Stock Valuation Where P S = present value of all payments on the common stock per share. D = the dividend per share of common stock to be paid at the end of the year. k S = the current cost of common stock.

Common stock valuation Example: Road King plans to pay Tk.3.5 dividend per share on its common stocks. Its dividends have been growing at 5 percent constant rate per year. The minimum required return on the stock is 14 percent. Calculate the value of Road King’s common stock. = Tk.38.89

Market Value of the Firm Where N D = number of bonds outstanding N P = number of preferred stock Outstanding N S = Number of common shares outstanding V 0 = D 0 N D + P 0 N P + P S N S

Market value of the firm Example: Road King currently 100,000 bonds, 20,000 shares of preferred stock and 1,000,000 shares of common stock outstanding. What is the estimated value of Road Kings capital? V 0 = Tk x 100,000 + Tk.208 x 20,000 + Tk x 1,000,000 = Tk.138,608,000 + Tk.4,160,000 + Tk.38,890,000 = Tk.181,658,000 = Tk million.