1. Stock Pricing/Valuation Valuation of Long-Term Securities Valuation of Financial Assets

2. Equity Financing Stock
Equity financing is the sale of ownership of he company for fund raising
Stock
Stock is the instrument of fund raising and it’s the claim of owners financial asset on the real assets of the company without any promised of dividend

3. Stock is arguable than there will be subjectivity
Stock is arguable than there will be subjectivity. If it subjectivity there will be variation and higher will be uncertainty and higher will be risk
Life of company is unlimited then the stock will be unlimited
If company is ongoing concern then stock will be ongoing concern

4. Undisputable Disputable Stocks Bonds Dividend Not Fixed
Market Price of Share (MPS)
Variation in share price volatility
Coupon
Fixed % of Face Value (FV)
Face Value
Fixed price written on the bond

5. Pricing of Bond Pricing
Pricing is the PV of future cash flow discounted at appropriate discount rate
PB = C1_ _ C2_ _ FV__
(1 + kd)1 (1 + kd) (1 + kd)t
Bond = kd = Cost of Debt
Stock = ke = Cost of Equity
Loan = i = Cost of Loan

6. Pricing of Stock
Ps = D1_ _ D2_ _ (on going stock) (1 + ke)1 (1 + ke)2
Ps = D1_ _ D2_ _ MPS_ _
(1 + ke)1 (1 + ke) (1 + ke)t
If resolved at maturity
Unlimited
Limited

7. Types of Stock Irredeemable Redeemable Ps (Unlimited)
Unlimited life of stock like common stock
Ps (limited)
Company will buy the stock at maturity

8. Techniques of Pricing/Valuation the Stock
Relative Models
Cash Based Models
Dividend Based Models
Value Added Models

9. Relative Models All information will be taken from market and books
Price Earning Ratio
P/E = MPS
EPS
Market to Book Ratio
P/BV = MPS___
BV per share

10. Relative Models Sales to Price Ratio S/P= Sales per Share MPS
If overall = Total Sales_ ___
Market Capitalization
Market Capitalization=MPS * No. of shares outstanding

11. Relative Models EBIT to Price Ratio Cash to Price Ratio
EBIT of per Share
MPS
Cash to Price Ratio
= Cash dividend per share

12. Cash Based Models Free Cash Flow Approach
FCF
Residual Equity Cash Flow Approach
RECF
Adjusted Present Value Approach
APV

13. Dividend Based Models No Growth Model Constant Growth Model
Supper Normal Growth Model OR
Phased Growth Model
2 or 3 Stage Growth Model

14. Value Added Models Economic Value Added Market Value Added
EVA
Market Value Added
MVA
Cash Value Added
CVA

15. Relative Model Price Earning Ratio P/E= MPS EPS Company MPS EPS P/E
Fair MPS
Decision A 40 20
40/20= 2
1.65*20= 33
Overvalued
Sell B 10 8
10/8= 1.25
1.65*8= 13.2
Undervalued
Buy C
100 60
100/60= 1.67
1.65*60= 99 D 5 3
5/3= 1.67
1.65*3= 4.95

16. Relative Model Price Earning Ratio
(P/E) of Industry = S (P/E) _ = =1.65
No. of Companies
If there is variation/subjectivity than there will be difference in between the actual and estimated/ fair price
Fair MPS = (P/E) of Industry * EPS
Overvalued  IF fair price is less than the MPS
Undervalued  IF fair price is greater than the MPS

17. Relative Model Sales to Price Ratio Company Total Sale No. of Shares
MPS
Sales per Share
S/P
Fair MPS
Decision 1
10000 50 40
10000/50=
200
200/40= 5
200/17.8=
11.23
Overvalued
Sell 2
5000 20 30
5000/20=
250
250/30=
8.3
250/17.8=
14.04 3
8000 10
8000/10=
800
800/20=
800/17.8=
44.94
Undervalued
Buy

18. Relative Model Sales to Price Ratio S/P= Sales per Share MPS
Sales per Share = Total Sales _
No. of Shares
When same market is efficient
(S/P) of Industry = S (S/P) _ = =17.8
No. of Companies
Fair MPS = Sales per Share_
(S/P) of Industry

19. Free Cash Flow
Cash flows which are available to distribute between bond holder (debt provider) and share holder (equity provider) after fulfilling the business requirement
Requirement
Operating Expenses/CGS
Tax
Working
Capital Expenditure (Investment in Fixed Asset)

20. Free Cash Flow
FCF = EBIT (1-Tax) + Depreciation + NWC + Capital Expenditure
EBIT = Earning Before Interest & Tax
NWC = Change In Net Working Capital
NWC = Net Working Capital
WC = Current Assed (CA)
NWC = CA – CL

21. Free Cash Flow No. Of Shares MPS = VE _ VE = Vc – Vd
VE = Value of Equity
VE = Vc – Vd
Vc = Value of Company
Vd = Value of Debt

22. Free Cash Flow VC = FCF (1+ gFCF ) WAVV – gFCF
gFCF = Growth Rate of FCF
WACC = Weighted Average Cost of Capital
gFCF (i/r) = (FVFCF/PVFCF) 1/t – 1

23. Free Cash Flow WAAC = WeKe – WdKd (1- Tax) We = Weigh of Equity
Ke = Cost of Equity
Wd = Weigh of debt
Kd = Cost of debt

24. Free Cash Flow Ke = Rf + b (Rm - Rf) Rf = Risk Free Rate (T-Bill Rate)
Rm = Market Risk
b = Systematic Risk

25. Choice of Growth Rate CAGR SAGR Cumulative Annual Growth Rate
If there is continuous increase pattern in FCF’s/ almost
Simple Average Growth Rate
If there is trend of increase or decrease
Growth rate will be calculated per year

26. Question Year EBIT Depreciation Capital Expenditure 2010 5000 500 600
If NWC is 10% of EBIT and Tax is 30% of EBIT
Rf = 5% Kd = 10% Rm = 15% Vd = 2200
b = 1.5 % D:E= 40:60 Wd = We = 0.6
gFCF = 5.3% Tax = 30% t = 5 PVFCF = 3700
Value of shares = FVFCF = 4780
Year
EBIT
Depreciation
Capital Expenditure
2010
5000
500
600
2011
5500
2012
6000
2013
2014
5800
2015
7000

27. Solution Expenditure NWC = Current NWC – Previous NWC
Year
EBIT
Depreciation
Capital Expenditure
NWC
2010
5000
500
600 --
2011
5500
550 50
2012
6000
2013
2014
5800
580
-20
2015
7000
700
120
NWC = Current NWC – Previous NWC
FCF = EBIT (1-Tax) + Depreciation + NWC + Capital
Expenditure

28. Solution gFCF = (FVFCF/PVFCF) 1/t – 1 gFCF = (4780/3700) 1/5 – 1
2010
2011
2012
2013
2014
2015
EBIT
5000
5500
6000
5800
7000
Tax
(1500)
(1650)
(1800)
(1740)
(2100)
Depreciation
500
NWC --
(50) 20
(120)
Capital Expenditure
(600)
(500)
FCF
3700
4150
4200
4080
4780
gFCF = (FVFCF/PVFCF) 1/t – 1
gFCF = (4780/3700) 1/5 – 1
gFCF = 0.053
gFCF =5.3%

29. Solution Ke = Rf + b (Rm - Rf) Ke = 0.05 + 1.5(0.15 – 0.05) Ke = 0.2
WAAC = WeKe – WdKd (1- Tax)
WAAC = 0.60 (0.20) – (0.40)(0.10)(1 – 0.3)
WAAC = 0.12 – 0.04 (0.7)
WAAC = 0.092
WAAC = 9.%

30. Solution VC = FCF (1+ gFCF ) WAVV – gFCF VC = 4780 (1 + 0.053)
0.092 – 0.053
VC =
VE = Vc – Vd
VE = – 22000
VE =107060

31. Solution
MPS = VE _
No. Of Shares
MPS =
1000
MPS =