practice

• Discounted cash flow method: - Dividend capitalization model - Earnings capitalization model

2. Relative Valuation Approach
   • Multiplier method

Dividend Capitalization Model

• Basic Model: The value of an equity share is the present value of its future stream of dividends.

• One Period Valuation Formula:
  $P_0 = \frac{D_1}{1 + k_e} + \frac{P_1}{1 + k_e}$

  Where:

  • $P_0$ = Value of share today
  • $D_1$ = Expected dividend at the end of 1st year
  • $P_1$ = Expected price of the share at the end of 1st year
  • $k_e$ = Required rate of return

Multi Period Valuation

• For holding the stock for n years:

  $P_0 = \sum_{t=1}^n \frac{D_t}{(1+k_e)^t} + \frac{P_n}{(1+k_e)^n}$

Perpetual Dividend Valuation Models

• No Growth or Zero Growth Model: $P_0 = \frac{D}{k_e}$

• Constant Growth Model: $P_0 = \frac{D_1}{k_e - g}$ Where:

  • $D_1$ = Dividend after 1 year
  • $g$ = Expected growth in dividend (%)