BIRLA INSTITUTE OF TECHNOLOGY

MESRA, RANCHI
DEPARTMENT OF MANAGEMENT

ASSIGNMENT

COURSE NAME- CORPORATE FINANCE

COURSE CODE-MT506

VALUATION OF CORPORATE SHARES

GROUP 1
SUBMITTED BY:
Amisha Kumari (MBA/10021/23)
Isha Kumari-(MBA/10059/23)
Anushree Srivastava-(MBA/10092/23)
Anita Kumari-(MBA/10136/23)
Daniya Alam-(MBA/10002/23)
Bulbul Kumari--(MBA/10056/23)
Prashansa--(MBA/10114/23)

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 CONTENT

S. no. Title Page no.

1 Introduction 3
2 Need or Purpose of Valuation of Shares 4
3 Constant growth model 6
4 Multiple growth model 8
5 Factors affecting valuation of shares 10
6 Conclusion 12

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 INTRODUCTION

Valua on of shares is the process of knowing the value of a company’s shares. Share
valua on is done based on quan ta ve techniques and share value will vary depending on
the market demand and supply. The share price of the listed companies which are traded
publicly can be known easily. But private companies whose shares are not publicly traded,
valua on of shares is really important and challenging.
Purpose of Share Valua on:
1. For Investors: Valua on helps investors gauge the poten al return on investment
(ROI) and understand the risks associated with buying or selling a stock. Knowing
whether a stock is fairly priced can guide decisions on whether to buy, hold, or sell.
2. For Companies: Share valua on assists companies in making strategic decisions for
issuing new shares, se ng a price in case of ini al public offerings (IPOs), and
determining stock price in mergers or acquisi ons.
3. For Financial Repor ng and Compliance: Valua on provides transparency and
ensures that financial statements reflect a company’s real market value, which is
crucial for regulators, auditors, and stakeholders.
Key Drivers of Share Valua on:
 Company Fundamentals: Metrics such as revenue, profitability, cash flow, and
growth poten al significantly influence share valua on.
 Economic Condi ons: Infla on rates, interest rates, and economic growth affect the
cost of capital and can impact valua ons.
 Industry Trends: Industry-specific factors, including technological advancements,
regulatory environment, and compe ve landscape, play a role in determining a
company’s poten al.
 Market Sen ment: The collec ve behaviour of investors can lead to short-term
devia ons from intrinsic value, which makes market valua on vola le.

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NEED OR PURPOSE OF SHARE VALUATION

Under the following circumstances the valua on of a share is important:

[Link] Amalgama on at the me of purchase: When two or more companies doing similar
business go into liquida on and new company is formed to take over their business, it is
known as amalgama on. In such a case, purchase considera on (The purchase considera on
is the price which is paid by the transferee company to the shareholders of the transferor
company) may be paid in the form of shares and it is agreed that purchase considera on will
be calculated on the basis of the intrinsic value of share of the transferor company and the
Intrinsic value of share can be calculated by dividing the net assets by the number of shares
of the paid up capital of the company and for that valua on of shares is necessary.

[Link] the internal reconstruc on of the company: Under internal reconstruc on a company
con nues in its legal en ty forma and is only recognized internally under sec on 319 of the
2013 Act. The objec ve of internal reconstruc on is to reduce the value of shares to their
actual value i.e., to reduce the share capital to the extent to which there is deficiency in the
value of assets. Therefore, in such a case to determine the amount payable to dissen ent
shareholder valua on of a share is important.

3. On conversion of shares: Where share of one class to be converted into shares of another
class, for example conversion of preference shares to equity shares. Here also point to be
noted is that only conver ble preference shares can be converted in to equity shares.

[Link] of private companies: Generally shares of private companies are not quoted on the
stock exchanges and if shares of such company are to be purchased or sold, the value of
such shares will have to be calculated so here also valua on required.

5. Appraisal of the Shares: When the shares are not quoted in stock exchange, the value of
such shares has to be ascertained.

6. For taking loan on shares security: Where loans are raised on the security of shares of a
company, it is necessary to ascertain the value of shares.

7. For the valua on of the Assets: The valua ons of shares are made by companies to find
the correct value of his assets for declaring the net asset value. (When amount for the asset
is paid in the form of shares).

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LIMITATIONS OF SHARE VALUATION

1. Dependence on Assump ons: Valua on models rely on future assump ons about
growth rates, cash flows, and discount rates. Small changes in these assump ons can
significantly impact the final valua on, making it sensi ve to forecas ng errors.

2. Market Vola lity: Short-term market fluctua ons and investor sen ment can cause
stock prices to deviate from their intrinsic value, making it difficult to determine a
"true" value, especially during periods of high vola lity.

3. Model-Specific Limita ons: Each valua on model has its own limita ons. For
example, the Discounted Cash Flow (DCF) model may not work well for companies
with unstable cash flows, while the Price-to-Earnings (P/E) ra o may not be relevant
for companies with nega ve earnings.

4. Data Quality and Availability: Accurate valua on requires reliable financial data,
which can some mes be unavailable or outdated, especially for private companies or
startups.

5. Industry Variability: Valua on methods may not apply uniformly across all sectors.
For instance, tech and biotech companies with high growth but li le profit may be
undervalued by tradi onal metrics.

6. Intangible Factors: Qualita ve factors such as brand reputa on, management

quality, or innova on are difficult to quan fy but can significantly impact a
company's value. Models o en overlook these intangible assets.

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CONSTANT GROWTH MODEL

The constant growth model is also known as Gordon’s share valua on model, named a er
the model’s originator, Myron J. Gordon.
The Constant growth model is a formula used to determine the intrinsic value of a stock
based on a future series of dividends that grow at a constant rate. It is a popular and
straigh orward variant of the dividend discount model (DDM). The GGM assumes that
dividends grow at a constant rate in perpetuity and solves for the present value of the
infinite series of future dividends.
Because the model assumes a constant growth rate, it is generally only used for companies
with stable growth rates in dividends per share.
The Constant model a empts to calculate the fair value of a stock irrespec ve of the
prevailing market condi ons and takes into considera on the dividend payout factors and
the market's expected returns. If the value obtained from the model is higher than the
current trading price of shares, then the stock is considered to be undervalued and qualifies
for a buy, and vice versa.
Dividends per share represent the annual payments a company makes to its common equity
shareholders, while the growth rate in dividends per share is how much the rate of dividends
per share increases from one year to another. The required rate of return is the minimum
rate of return investors are willing to accept when buying a company's stock, and there are
mul ple models investors use to es mate this rate.

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USE OF CONSTANT GROWTH MODEL

1. Mature Companies:
The Constant Growth Model works best for well-established, mature companies with
predictable earnings and dividend histories. Such companies have generally passed
their high-growth phase and now experience stable, moderate growth. Examples
include companies in sectors like u li es or consumer goods, which are less prone to
rapid changes in market dynamics. Mature companies typically have a stable cash
flow, allowing for regular dividend payouts that can be projected over me.

2. Stable Dividends:
The model is designed for companies that pay steady dividends, which increase at a
constant, predictable rate. This requirement makes it unsuitable for companies with
irregular dividends or those that reinvest most of their profits instead of paying
dividends, like tech startups. Companies that fit this model have a reliable track
record of dividend growth, making it easier to es mate future payments with
accuracy.

3. Long-Term Investors:
The Constant Growth Model is primarily suited for long-term investors who plan to
hold their investments for an extended period. Since it assumes dividends will grow
at a fixed rate indefinitely, it doesn’t account for short-term market fluctua ons or
economic downturns. Investors focused on long-term returns and income stability,
such as re rees or income-focused investors, may find this model helpful for
evalua ng dividend stocks.

4. Known Growth Rates:

For the model to be accurate, the dividend growth rate must be known, stable, and
predictable. It should also be less than the required rate of return, or else the
formula will not work (the denominator would be zero or nega ve). When the
growth rate is consistent and lower than the return rate, it allows for a reasonable
es ma on of the stock’s intrinsic value. Es ma ng growth rates for fast-growing or
unpredictable companies is challenging, which limits the model’s effec veness in
those cases.

5. Low Vola lity Industries:

The model is most effec ve in low-vola lity sectors where earnings and dividends are
less likely to fluctuate significantly. Industries like u li es, telecommunica ons, and
consumer staples tend to have steady cash flows and less sensi vity to economic
cycles.

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MULTIPLE GROWTH MODEL

Mul -stage dividend discount model is a technique used to calculate intrinsic value of a
stock by iden fying different growth phases of a stock; projec ng dividends per share for
each the periods in the high growth phase and discoun ng them to valua on date,
finding terminal value at the start of the stable growth phase using the Gordon growth
model, discoun ng it back to the valua on date and adding it to the present value of the
high-growth phase dividends.
The basic concept behind the mul -stage dividend discount model is the same as constant-
growth model, i.e. it bases intrinsic value on the present value of expected future cash flows
of a stock. The difference is that instead of assuming a constant dividend growth rate for all
periods in future, the present value calcula on is broken down into different phases.
Key Phases in a Mul ple Growth Model:
1. High-Growth Phase: In the early years, companies may experience rapid growth,
driven by new market opportuni es, technological advancements, or product
launches. This phase is characterized by high revenue growth and may last un l the
business reaches a more mature stage.
2. Transi on Phase: As the company matures, growth rates may begin to moderate.
This phase marks a shi from rapid expansion to more sustainable growth as the
business solidifies its market posi on and opera onal efficiencies.
3. Stable Growth Phase: In this final stage, the company’s growth stabilizes and o en
aligns more closely with the industry average or economic growth. Cash flows and
growth rates tend to become predictable, making it easier to es mate long-term
projec ons.
Applica on and Benefits
A mul ple growth model is par cularly useful for businesses with non-linear growth
pa erns, as it accommodates varying growth assump ons across different phases. This
approach also allows investors and analysts to adjust for changing risk profiles, compe ve
pressures, and economic factors, leading to a more nuanced and precise valua on.
By capturing the intricacies of each growth phase, this model is valuable for stakeholders
aiming to make informed investment decisions, set strategic targets, or conduct accurate
financial planning.

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USE OF MULTIPLE GROWTH MODEL

1. Changing Growth Rates: This model is beneficial when a company is expected to

experience varying growth rates over me due to market dynamics or internal
factors. By accoun ng for different growth phases, the model can provide a more
accurate valua on.

2. Lifecycle Stages: Companies typically go through various lifecycle stages, including

high growth, transi on, and maturity. The mul ple growth model captures these
stages, allowing for dis nct growth rates at each phase, which is essen al for
accurate financial analysis.

3. Strategic Changes: When a company undergoes major strategic transforma ons—

such as mergers, acquisi ons, or shi s in business focus—its growth rate may change
significantly. The mul ple growth model adapts to these fluctua ons, providing a
flexible approach to valua on.

4. Economic Cycles: In cyclical industries, growth rates are o en ed to economic

condi ons. This model can account for varia ons in growth due to economic upturns
and downturns, which is crucial for industries like real estate, energy, or automo ve.

5. Complex Business Models: For diversified companies opera ng in different segments

with varying growth rates, the mul ple growth model allows for tailored growth
assump ons across each segment, leading to a more comprehensive valua on.

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 FACTORS AFFECTING VALUATION OF SHARES

1. Market Condi ons

Economic trends, interest rates, and overall market sen ment play a significant role in
shaping share prices. When the economy is growing (in a bull market), investors are
generally more op mis c, leading to rising stock valua ons. Lower interest rates tend to
make borrowing cheaper, which can spur business expansion and higher profits, o en
transla ng into higher share prices. Conversely, higher rates can dampen growth, leading to
lower stock prices. Market sen ment reflects how investors feel about the overall market
condi ons—posi ve sen ment can drive prices up, while nega ve sen ment, especially
during recessions, can lead to declining prices.

2. Industry Trends
The performance of en re sectors or industries influences individual companies. For
example, a breakthrough innova on can boost the stock prices of companies in the tech
sector, while new regula ons may hurt companies in the healthcare or financial sectors.
Similarly, shi s in consumer preferences (like a rising trend for sustainable products) can
boost companies that align with these shi s, while others might struggle. For example,
electric vehicle companies may see their stock prices rise as demand for eco-friendly
transporta on grows.

3. Company Fundamentals
The financial health of a company directly impacts its valua on. Key indicators such as debt
levels, cash flow, and assets are scru nized by investors. Companies with high debt levels
may be seen as risky, which can lead to lower stock prices, whereas companies with strong
cash flow and solid assets tend to be valued higher as they are seen as financially stable.
Strong fundamentals o en signify a company’s ability to weather economic downturns and
con nue genera ng profits, which can a ract more investors.

4. Dividends
Dividends are a form of return to shareholders. Companies that pay regular or increasing
dividends are o en viewed more favorably by investors seeking reliable income, which can
drive up their stock prices. This is especially true for dividend-paying stocks in sectors like
u li es or consumer staples. For many investors, these stocks provide stability and income,
leading to higher demand, which in turn raises valua ons.

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5. Growth Poten al
Companies with strong growth prospects, especially those in emerging industries or
markets, o en a ract a premium valua on. Investors are willing to pay more for companies
they believe will grow rapidly and provide higher returns in the future. For example, tech
startups or companies in green energy or ar ficial intelligence sectors may be valued higher
than tradi onal businesses, even if they are not yet profitable, because the market
an cipates substan al future growth.

6. Public Percep on and Branding

A strong brand and posi ve public image can significantly enhance a company’s valua on.
Companies with a reputable brand o en experience greater customer loyalty, which can
lead to higher sales, margins, and ul mately, stock prices. For example, companies like Apple
or Tesla are not only valued for their products but also for their strong brand iden es,
which have a direct impact on their financial performance and investor percep ons. A good
reputa on can also help companies a ract top talent, forge partnerships, and weather
challenges, all of which contribute to higher valua ons.

In summary, share prices are influenced by a combina on of macroeconomic factors,

industry-specific trends, the company’s financial health, growth poten al, public percep on,
and its ability to provide consistent returns to investors. Understanding these factors allows
investors to make more informed decisions about buying or selling shares.

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CONCLUSION

The valua on of corporate shares is a mul faceted process that requires a comprehensive
analysis of various factors. These include market condi ons, industry trends, company
fundamentals, growth poten al, dividends, and public percep on. The interplay of economic
trends and interest rates o en dictates the broader market environment, which in turn
influences investor sen ment and share prices. Meanwhile, the specific dynamics of an
industry—such as innova on, regulatory changes, and shi ing consumer preferences—can
create opportuni es or pose challenges for companies within that sector, impac ng their
stock valua ons.

At the corporate level, the financial health of a company, evidenced by its debt levels, cash
flow, and asset management, plays a crucial role in shaping its stock value. Companies with
strong fundamentals are typically perceived as stable and less risky, thus commanding higher
valua ons. Furthermore, the growth poten al of a company, par cularly those in emerging
industries, can significantly boost its market value as investors look for opportuni es with
higher returns.

Dividends are also a cri cal factor, as companies that consistently offer dividends are o en
viewed more favorably by investors seeking steady income, driving up their share price.
Addi onally, a strong brand and posi ve public image can enhance a company’s perceived
value, a rac ng more investors and leading to higher stock prices.

In conclusion, the valua on of corporate shares is influenced by a dynamic combina on of

external market forces, internal company performance, and investor sen ment.
Understanding these factors allows investors to assess the true worth of a company and
make informed investment decisions. Ul mately, the ability of a company to generate
sustainable growth, offer returns, and maintain a posi ve public image determines its long-
term stock valua on.

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 REFERENCES
• h ps://[Link]/s/valua on-of-shares
• h ps://[Link]/terms/v/valua [Link]
• h ps://[Link]/cde/SLM/[Link].%20Bank%20Management/Corporate%20A
ccoun ng/Unit%[Link]
• h ps://[Link]/docs/4th_sem/site/SAPM/Unit-
5%20Valua on%20of%20Securi es/5.c%20Factors%20Influencing%20Value%20of
%20a%[Link]
• h ps://[Link]/terms/g/[Link]
• h ps://corporatefinanceins [Link]/resources/valua on/mul ple-period-
dividend- discount-model/
• Book Referred: Security Analysis and Por olio Management

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