Valuation of Preference Shares and Equity shares

Valuation of preference shares

         Preference shares, like debentures are subject to a fixed rate of return or dividend, In case of no stated maturity, their valuation is similar to perpetual bonds
          The valuation of redeemable preference shares have their redemption value part also.

 Valuation of Equity Shares

• Single Period Valuation Model: If the investor holds the security for one year, the value of such equity share will be:-

• Multi-Period Valuation model :-Since, there is no maturity period for equity share, the value of an equity share of infinite period is equal to the discounted value of the stream of dividends of infinite duration, We will calculate the value of equity shares with three conditions of dividends

(a) Zero Growth model / Constant dividends :- It is an approach to equity valuation that assumes a constant, non growing, dividend stream for infinite period.

Suppose, equity earns a dividend D every year

(b) Constant growth model / Gordon model:- It is assumed that dividends tend to increase over time because business firms usually grow over time. Therefore, if the growth of dividend is at a constant compound rate,then