Equity valuation - Share Valuation

10 important questions on Equity valuation - Share Valuation

What are the 3 dificulties of Share Valuation?

1. Cash flows are uncertain.
2.  Life of investment is uncertain because an equity can theoretically last forever.
3. Difficult to measure the expected return the market expects.

How do you calculate the Present Value of Equity?

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What are the 3 Scenarios of Share Valuation?

1. Zero Growth
2. Constant Growth
3. Differential Growth
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For a Zero-Growth shar of equity =, this implies that:

D1 = D2 = D3 = D = constant

What happens when divident given is always a steady rate?

it is Constant growth:
The dividend for a given company always grows at a steady rate, g.
If we let D0 be the dividend just paid, then the next dividend, D1, is:
D1 = D0 x (1 + g)

When you have dividends in two periods, you calculate this through:

D2 = D1 x (1 + g) = [D0 x (1 + g)] x (1 + g) = D0 x (1 + g)2

What is a Growing perpetuity?

An asset with cash flows that grow at a constant rate forever is called a growing perpetuity (constant growth)

Explain how non-constant growth works:

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What are the share valuation components of the required return?

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What does Capital Gains Yield mean?


The dividend growth rate, or the rate at which the value of an investment grows

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