XYZ ltd earned the operating profit of rs .50,000. Company is having 1000 ordinary shareholders. The company already has a 9% debenture of Rs.200000 and the 12 % preference share of Rs. 150000. The company declared the 40% D/P ratio.The market val?
Answer
There are 3 ways to look at the market valuation of the stock based on the information given by you.
· You can look at a P/E approach. Apply a reasonable P/E to the earnings of the company and arrive at the valuation of the company.
· You can also use the dividend discount model assuming that the dividend continues to perpetuity. You can reduce the dividend by growth rate to get a better picture.
· Lastly, you can project cash flows for the future and discount it back to the present value to get market value.
Normally, a combination of all the three methods is used and they are used to ratify market value.