Value is the concern of almost every transaction and it also involves the interaction of both financing and investment decisions. As such various method of valuation of different types of companies as well as issues in valuation are examined in this topic.

Summary

Valuation are conducted for a variety of reasons. As such, in carrying out a valuation, it is critical to know what the purpose of the valuation is. In performing a valuation, the value needs to select a method that is compatible with the characteristics of the valuation subject. With any valuation model, the integrity of the inputs into the model is critical for the reliability of the result. All valuation methods have their strengths and shortcomings. It is important to recognise these shortcomings so that valuation results are not misinterpreted.

Self-Assessment / Activity

1. Firm X has a dividend payout ratio of 60%. Growth rate is expected to remain constant at 5% per annum for an indefinite period of time. The last reported earnings per share of firm X is RM3. Base on the required rate of return of 8%. what is firm X’s share price?
A. RM60
B. RM63
C. RM100
D. RM1005

2. The firm expects to pay out dividends of RM5 per share next year. The share price of the firm is RM55 per share. If the required of return is 12% and the firm expects to maintain a constant growth rate of the firm?
A. -2.90%
B. 2.80%
C. 2.90%
D. 3.10%

Questions 3 and 4 are based on the following:
Investor Y’ has just a large amount of money and is considering investing in a technology share recently listed on Bursa Malaysia, firm S. Firm S experts expects to pay out dividends next year. The dividend payout ratio is expected on to be 30%. the firm expects their earnings to grow at 20% per annum for the next year 3 years only to stabilize to 8% for an indefinite period of time. The firm recently announced that the firm had recorded an earnings per share of RM5 for the last financial year end. Investor Y’s required rate of return is 10% per annum.

3. Based on the above information, what is the price of the share of firm S?
A. RM101.11
B. RM110.56
C. RM121.11
D. RM145.34

4. Based on the above, if the current market price of firm S is RM105, what action should be taken by investor Y?
A. Buy the share
B. Hold on the cash and do not buy the share
C. Place has money in the fixed deposit that will pay him an annual interest of 3%.
D. Do not take any action