Share Valuation

Question 1

Market Value of Ordinary Shares

Answer 1

• The market value of a share is equal to the present value of the future cash flows, which are the dividends.
• Dividend Growth model calculates the present value of a constantly increasing stream of dividends, thus calculating the market value of the share.
• Market value of a share is equal to the present value of future dividends

Question 2

MV of Ordinary Share – Constant Growth Rate Model

Answer 2

MV=(D0 (1+g))/((r−g))
MV= D1/ (r-g)
D0 = dividend now; g=growth rate
D1 = div in one year; r=required return
Assumes constant rate of growth

Question 3

MV of Preference Shares

Answer 3

-Preference share is a perpetuity.
-MV is the present value of the future cash flows
Dividend (fixed) / Required Return