IGNOU : M.COM : MCO 7 : UNIT 3 : Q - 1. Explain the various appraoches used to value equity shares?

 

Ans. VALUATION OF EQUITY SHARES

Equity shares or common stock is not so easy to value. The cash flows are not stable and not easily identiable. The Future stream of earnings poses two problems. First, it is neither specified nor perfectly known in advance. Second, dividends and earnings are two alternatives to be chosen from, thus, there are two approaches used to value equity shares based on dividend and earnings.

1) Dividend Capitalization Approach

2) Earnings Capitalization Approach

Dividend Capitalization Approach

A problem in using the dividend valuation model is the timing of cash flows, we shall examine it in two situations.

1) Single period valuation

2) Multiple period valuation

This will be further examined assuming

a) Dividends do not grow in future i.e., zero growth. they are constant

b) Dividends grow at a constant rate in future

c) Dividends grow at a varying rate in future

Please SEE Page No. – 35 TO 40 OF UNIT 3