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SECTION 1: CONCEPT OF VALUATION

     Book Value

     Replacement Value

     Liquidation Value

     Going Concern Value

     Market Value

     Intrinsic Value

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 VALUATION CONCEPTS

- Accounting concept- Value recorded in books of accounts; historical cost

- BV of Assets = Historical Cost ± Depreciation

- BV of Intangibles = Acquisition cost ± Amortization

- BV of Debt = Stated outstanding amount

- Networth = BV of assets ± BV of liabilities

 Book Value

 Replacement Value

- Value that will be required to spend if all the assets were to replaced incurrent condition

- Difficult to estimate

- Likely to ignore intangibles and utility of existing assets

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 VALUATION CONCEPTS

 Liquid at i on Value

- Amount realized if the business is terminated and all assets are sold- Will not include value of intangibles

- Minimum value that company will accept if sold its business

Goi ng Concern Value

- Amount realized if the company sold its business as an operating business

- Always higher than liquidation value

- Reflects future value of assets and intangibles

 Market Value

- Current price at which asset or security is being bought or sold in the market

 Intri nsi c Value

- Economic value

- PV of cash flows expected from a security discounted at rate of returnappropriated for the risk associated with the security 

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SECTION 2: VALUATION OF BONDS

     Features of a Bond

     Bond Valuation

     Bond Yield

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FEATURES OF A BOND

- A long term promissory note for raising loan

- Carries a promise by the borrowing company to make i nterest payment to the

debenture holders of specifi ed amount , at a specified time and also to repay the pri nci  pal amount at the end of the specifi ed peri od 

 F ace Value / Par Value

- Value stated on face of the bond

Coupon Rate

- Interest rate on a bond ; known to bondholders

- Interest = Par Value x Coupon rate

- Interest paid on bond is tax deductible

 Maturi ty

- Issued for a specified time and repaid at the end of it i.e. maturity 

 Red empt i on Value

- Value received by bondholder on maturity 

 Market Value

- Current price at which bond is being bought or sold in the market

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 VALUATION OF A BOND

 Bond wi th Maturi ty ± Annual Interest Payment 

n C M 

P  = 7 +

t =1 (1+r )t  (1+r )n

 Bond wi th Maturi ty ± Semi Annual Interest Payment 

2 n C/ 2  M 

P  = 7 +

t =1 (1+r  / 2 )t  (1+r  / 2 )2n

P = C x P V IF A r,n + M x PVIF r,n

P=C/2 xPVIF A r/2, 2n + M x P V IF r/2,2n

 Perpetual Bond 

P = C / r

P = Value of bond

C = Annual couponpayment

M = Maturity valuer = Periodic requiredreturn

t = time period whenpayment is received

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1. A Rs. 100 par value bond  beari ng coupon rate o f  12% wi ll mature i n 5 years. W hat i s the value o f the bond, if the di scount rate i s 1 5 %? 

 Ans: Rs. 89.92

2. A Rs. 100 par value bond  bears coupon rate o f  14% and  matures i n 2

years. Interest  i s payable semi  annually. Compute value o f  the bond, if  thedi scount rate i s 16%? 

 Ans: Rs. 96.72

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PRICE - YIELD RELATIONSHIP

PRICE

 YIELD

PRICE CHANGES WITH TIMEVALUE OF 

BOND

PREMIUM BOND:

A

PAR VALUE BOND:

B

DISCOUNT BOND: 

8 7 6 5 4 3 2 1 0 YEARS TO MATURIT Y

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YIELD TO MATURIT YC C C M  

P  = + + «. +(1+r ) (1+r )2 (1+r )n (1+r )n

8 90 1,000

800 = 7 +

t =1 (1+r )t  (1+r )8

AT  r  = 13% « RHS = 808

AT  r  = 14% « RHS = 768.1

 YTM

= 13% + (14% - 13%)x 808 - 800 = 13.2%808 ± 768.1

C + (M - P ) / n

 YTM 

0.4M + 0.6 P 

 YIELD TO MATURITY 

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1. Market pri ce o f  a Rs. 1000 par value bond  carryi ng coupon rate o f  14%

and  maturi ng a f ter 5 years i s Rs. 10 5 0. W hat  i s the approx YTM on thi sbond ? 

 Ans: 12.62%

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SECTION 3: VALUATION OF PREFERENCE

SHARES

     Preference Share Valuation

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PREFERENCE SHARE VALUATION

 Red eemable Pre f erence Share

n D M 

P  = 7 +

t =1 (1+r  p)t  (1+r  p)n

 Irred eemable Pre f erence Share

P = D / rp

P = Value of preference share

D = Annual dividend

n = Life of preference share

rp = Periodic required return onpreference share

M = Maturity value

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1. Suppose an i nvestor i s consid eri ng to buy a 12 year, 10% Rs.100 par value pre f erence shares. The red empt i on pri ce o f  pre f erence share on maturi ty i s Rs. 120. The i nvestor's requi red  rate o f  return i s 11%. W hat shoul d  she be

wi ll i ng to pay f or the share now? 

 Rs. 99.24