Investment Valuation in India

Seven Major Mistakes done by Traders 1. Lack of Knowledge and No Plan It is surprising that some people expect to trade the stock market effectively without any effort. However, if they want to take up golf, for instance, they will happily take several lessons or at least read a book before heading out onto the course. The stock market is not the place for the poorly informed. Although learning what you need is easy, you just need someone to show you the way. The contradictory extreme of this is those traders who spend their life looking for the Holy Grail of trading. The fact is that there is no Holy Grail. But the excellent news is that you don't require it. Indian trading system is highly successful, easy to learn and low risk. 2. Unrealistic Expectations Many beginner traders expect to make huge money over a trading week. The stock market can be an enormous way to restore your current income and for creating wealth but it does need time. Not a lot, but of course some tim...

Private equity players say they are all weather players. They admittedly look for growth stories and value multiplication of investments. Most PE investors say their investments are not valuation-specific, and they do not mind paying higher valuations if there is growth potential. But the actual PE investment trend, over time, throws up an opposite picture. An analysis of PE investments made in India between 1998 and 2008 shows that PE investors remained silent during the bear period barring some one-off deals, and they aggressively invested during the bull-run even at higher valuations. To successfully execute a PE investment, a fund manager needs to identify and access an investment opportunity, finance the company through a properly structured instrument, create new shareholder value and realise it via an advantageously structured and executed ‘exit’ transaction. Superior investment return is not the only reason why more and more investors are turning to PE. A sophisticated investor...

Gordon Model (Constant Growth rate) The Gordon model assumes a constant growth rate for infinity. The value of the stock is given by: V = D1 / (Re - g) Where, D1 = Expected dividend at the end of the year Re = Required rate of return on equity g = Expected growth rate for a long period of time (mathematically, infinite period) For example, A Ltd. Reported earnings per share (EPS) of Rs 15 last year and paid out 52% of its earnings as dividend. The earnings and dividends are expected to grow at the rate of 8% in the long term as in the past. If the required rate of return on equity shares of A Ltd. is 12%, the value of the security is calculated as follows; EPS = Rs 15 The Current dividend per share is given by the payout ratio times the EPS. Dividend per share (D0) = 15 x 0.52 = Rs. 7.8 So the expected dividend would be given by multiplying the current dividend with the expected growth rate. Dividend per share (D1) = 7.8 x 1.08 = Rs. 8.42 Expected growth rate = 8% Required rate of retu...

The term dividend refers to that part of after-tax profit which is distributed to the owners (shareholders) of the company. The undistributed part of the profit is known as Retained earnings. Higher the dividend payout, lower will be retained earnings. The dividend policy of a company refers to the views and policies of the management with respect of distribution of dividends. The dividend policy of a company should aim at shareholder-wealth maximization. The essence of dividend policy is: If the company is confident of generating more than market returns then only it should retain higher profits and pay less as dividends (or pay no dividends at all), as the shareholders can expect higher share prices based on higher RoI of the company. However, if the company is not confident of generating more than market returns, it should pay out more dividends (or 100% dividends). This is done for two reasons. One, the shareholders prefer early receipt of cash (liquidity preference theory) and sec...

The Black and Scholes Model : The Black and Scholes Option Pricing Model didn't appear overnight, in fact, Fisher Black started out working to create a valuation model for stock warrants. This work involved calculating a derivative to measure how the discount rate of a warrant varies with time and stock price. The result of this calculation held a striking resemblance to a well-known heat transfer equation. Soon after this discovery, Myron Scholes joined Black and the result of their work is a startlingly accurate option pricing model. Black and Scholes can't take all credit for their work, in fact their model is actually an improved version of a previous model developed by A. James Boness in his Ph.D. dissertation at the University of Chicago. Black and Scholes' improvements on the Boness model come in the form of a proof that the risk-free interest rate is the correct discount factor, and with the absence of assumptions regarding investor's risk preferences. The M...