Valuation of Bonds and Shares
Valuation is the procedure of linking risk with returns to determine the worth of an asset. Assets can be financial or real and securities are called financial assets. Physical assets are considered as real assets. The main goal of any individual investor is maximization of profits. Investment management is a uninterrupted process requiring constant monitoring. The value of an asset is based on the cash flow it is countered to rendered over the holding period. The fact that as on date there is no method by which prices of shares and bonds can be accurately countered should be kept in mind by an investor before an investor
decides to take an investment decision. We can formulate our investment system by employing the variables to maximize our returns. Ordinary shares are more high-risk than bonds or debentures and some shares are more risky than others. The investor would thus commit funds on a share only if he is convinced about the rate of return being coextensive with risk.
Intrinsic value Concept:
A security can be measured by the group of dividends or interest payments due over a period of time. In other sense, a security can be outlined as the present value of the future cash streams the intrinsic value of an asset is equal to the present value of the
benefits linked with it. The countered returns are discounted using the requisite
return commensurate with the risk, it can be mathematically formulated as:
V0=C1/(1+i) 1 + C2/(1+i) 2 + C3/(1+i) 3 + Cn/(1+i) n = Cn/(1+i) n
Here V0= Value of the asset at time zero (t=0)
P0= Present value of the asset
Cn= anticipated cash flow at the end of period n
i= Discount rate or requisite rate of return on the cash flows
n= anticipated life of an asset.
Concepts of Value
Replacement Value
Replacement value is the amount a company is requisite to expend if it were to exchange its existing assets in the present condition. It is hard to search for the cost of assets currently employed by the company.
Liquidation value
Liquidation value is the sum a firm can actualize if it sold the assets after the winding up of its business. It will not admit intangibles value as the operations of the company will cease to exist. Liquidation value is in general the minimum value the company might admit if it sold its business.
Book value
Book value is an accounting conception. Value is an asset is deserving today in terms of their possible benefits. Assets are showed at historical cost and these are evaluated over years. Book value may let in non physical assets at acquisition cost minus amortized value. The book value of a debt is shown at the outstanding amount. The difference amongst the book value of assets and liabilities is equal to the net worth of shareholders. Net worth is the sum total of compensated up capital, surplus and reserves. Book value of a share is computed by dividing the net worth by the number of shares outstanding.
Going Concern value
Going concern value is the sum a firm can actualize if it sells its business as an operating one. This value is greater than the liquidation value. Market value is the current price at which the security or asset is being bought or sold in the market. Market value per share is in general higher than the book value per share for growing and profitable business firms.
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