Equity Markets (Valuations

Question 1

Asset Based Valuations

Answer 1

Arguably the most appropriate where the business is significantly tied up in value of an asset owned by the company. e.g. investment trusts, property and capital based industries

The minimum price for the company may be stated as the net realisable value of the assets i.e. what the assets may be sold for

An investor would have to establish an orderly sale of the assets to not cause of fire sale (which pushes price down as they’re selling because they have to)

Question 2

Dividend Based Valuation

Answer 2

Dividend-based valuations start with the assumption that the price or market value is equal to the present value of the future expected cash flows (dividends), discounted at the market required rate of return.

Assuming the value of the dividends are constant in perpetuity the value of the equity may be estimated to be:

Price = Dividend per share/Cost of capital

25p/15%= 166.67

Question 3

Dividend Based Valuation Improved

Answer 3

The assumption of constant dividends is not reasonable because they’re expected to grow constantly due to:
Reinvesting creating more output creating more profit over time
They are money payments subject to inflation over time

New Formula: Price = Dividend per Share / Cost of Capital - Growth Rate

25p / 15% - 10% = 500.00