Basic Formulas
S.
No.
|
Formula
|
|
1.
|
Dividend
Rate
|
DPS
* 100
Face
Value
|
2.
|
Dividend
Per Share (DPS)
|
Total
Dividend
No.
of Share
|
3.
|
Dividend
Payout Ratio (DPR)
|
DPS*100
EPS
|
4.
|
Dividend
Yield Ratio
|
DPS*100
Market
Price
|
5.
|
Retention
Ratio
|
(EPS
– DPS)*100
EPS
|
6.
|
Market
Capitalization
|
Share
Price * No. of Share Outstanding
|
7.
|
Price
Earnings Ratio
|
Price
EPS
|
8.
|
Quadratic
Equation – X =
|
-
b ± √ (b2 – 4ac)
2a
|
9.
|
ROI
|
EPS
BVPS
|
10.
|
Growth
(g)
|
b
x r (where b is retention
ratio)
|
11.
|
Compounded
Annualized Growth Rate (CAGR)
|
(Closing
Value)1/n – 1
Opening Value
|
Cost of Capital
S.
No.
|
Name
of Method
|
Formula
|
Remarks
|
|
1.
|
Dividend
Growth Model/Dividend Discount Model
|
Ke
=
|
D1 + g
Price
|
Where
g is Growth
|
2.
|
Capital
Assets Pricing Model (CAPM)
|
Ke
=
|
Rf
+ β(Rm – Rf)
|
Where
β is Systematic Risk of Security and Rf is
Risk Free Return from Market, (Rm – Rf) is Market Risk
Premium and β(Rm – Rf) is Security Risk Premium
|
3.
|
Earning
Yield Method
|
Ke=
|
EPS X 100
Price
|
|
4.
|
Base
on Price Earnings Ratio
|
Ke=
|
1
PER
|
Where
PER is Price Earnings Ratio, PER = Price
EPS
|
Share Price
S.
No.
|
Name
of Method
|
Formula
|
Remarks
|
|
1.
|
Traditional
Approach (Graham & Dodd Model)
|
Price
=
|
M(D
+ E)
3
Or
M (4D + RE)
3
|
M
is Multiplier
D
is Dividend Per Share
E
is Earning Per Share
RE
is Retained Earning
|
2.
|
Walter’s
Approach
|
Price
=
|
D + (E – D) x r
Ke Ke
Ke
|
r
= Rate of Return on Investment
E
= Earnings Per Share
Ke
= Weighted Average Cost of Capital
|
Note: - If r > Ke then share price
would be maximum at 0% dividend payout.(Growth Firm)
Note: - If r < Ke then share price
would be maximum at 100% dividend payout.(Declining Firm)
Note: - If r=Ke then there is no impact
on share price due to dividend policy i.e. Dividend policy is irrelevant.
(Normal Firm)
Walter’s Approach
is also called all or nothing approach (all = 100% payout & Nothing = 0% Payout)
|
||||
3.
|
Gordon
Growth Model
|
Price
|
D1
Ke
- g
|
D1
is Next Year Dividend,
|
Assumption of Gordon’s
Growth Model: -
1. The firm is
all equity firm and it has no debt.
2. Source of
finance is retained earnings and no other alternative to raise finance.
3. Internal rate
of return (r) & cost of capital (Ke) remains constant.
4. The firm has
perpetual life.
5. Retention
ratio once decided remains constant.
6. Discount Rate
is greater than growth rate (Ke > g).
|
||||
4.
|
Dividend
Discount Model (When No Growth)
When
Constant Growth
When
Different Growth
|
Price
=
Price=
Price
=
|
D
Ke
D1
Ke
– g
D1/(1+Ke)1
+ D2/(1+Ke)2 + D3/(1+Ke)3 + …… Up to Different Growth +
(Dn-1/Ke-g)/(1+Ke)n
|
|
5.
|
Lintner’s
Model
|
D1
=
|
D0
+ (EPS x DPS – D0) x Adjustment Factor
|
|
6.
|
Modigilani - Millar Model
|
P0
=
|
P1
+ D1
1+
Ke
|
P0
= Current Market Price
P1
= Market Price at Year end
nP0
= Current Value of Firm
n
= Present No. of Shares
m
= Additional Shares at year end market price
I1
= Investment to be made at year end
X1 = Earing During Year
|
Np0
=
|
(n
+ m) x P1 – I1 + X1
1
+ Ke
|
Steps for Value
of Firm by M-M Approach
Step I – Share Price after 1 Year (P1)
Step II - Income after 1 Year (X1)
Step III – Dividend after 1 Year (D1)
Step IV – Retained Earnings after 1 Year (X1
– D1)
Step V – Investment to be done after 1
Year (I1)
Step VI – Balance amount to be raised from
Equity Market (I1 –R1) at (P1)
Step VII – New Share to be issued (m = Step/
P1)
Step VIII – Market Value after 1 Year (n + m)
x P1
Step IX – Calculation of P0 from
value in Step VIII. Value from this step should be equal to the value of firm
at P0.
Decision Making
I. If fundament Price is greater than actual
market price then –
Stock is
undervalued
Buy Recommendation
II. If Fundamental price is less than
actual market price then-
Stock is overvalued
Sell Recommendation
III. If fundamental price is equal to
actual market price then-
Stock is valued
correctly
Hold Recommendation
if already purchased earlier.
Residual Payment
Policy: - Residual
Payment Policy means distribute retained earnings (profits) after making
investment needs.
Trigger Point to
identify D1 or D0
Points to Trigger D0
= Historical/Past/Paid/Last Year
Points to Trigger D1
= Future/Expected/will pay/next
year
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