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❖ Security Valuation Where, PE or Multiple Approach
D0 is Dividend Just Paid,
Expected Return : Value of an Equity Share = EPS X PE
g1 is Finite or Super Growth Rate
g2 is Normal Growth Rate Ratio
(Rx) = Rf + βx (Rm - Rf)
Ke is Req. Rate of Return on Equity
Enterprise Value (EV)
Where, Pn is Price of share at the end of
Rx is expected return on equity Super Growth. FCFF
EV =
Rf is risk-free rate of return K−g
βx is beta of "x" H Model
Where,
Rm is expected return of market t
D0 X 2 X (gs − gL ) D0 (1+gL ) FCFF is Free cash flow to firm
P0 = +
(Ke − gL ) (Ke − gL ) k is Weighted Average cost of Capital
Equity Risk Premium :
g is Growth rate
(Rx -Rf ) = βx (Rm - Rf) Where,
gs is super normal growth rate
Equity Valuation for a holding gL is normal growth Theoretical Ex-Right Price (TERP)
period of one year t is time period
nP0 +S
TERP =
n+ n1
P0 = D1+1+KP1 Gordon’s Model (Earnings
e
Approach) Where,
Where, n is Number of existing equity shares,
EPS1 (1−𝑏) P0 is Price of Share Pre-Right Issue,
𝐷1 – Dividend at the end of year 1, 𝑃1 - P0 =
(Ke − br ) S is Subscription amount raised from
Price at the end of Year 1 & 𝐾𝑒 – Cost
Right Issue &
of Equity. Where, n1 is No. of new shares offered
P0 is Price per share
b is Retention ratio Value of Right
Valuation of Equity – Zero Growth r is Return on Equity
D br is Growth Rate (g) P0 − S
P0 =K Value =
e n
Enterprise Value:
EV = MC + D − C
Where,
MC is Market capitalization,
D is debt and C is Total Cash
Equivalents.