Page 155 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes (d) Comprehensive earnings/losses will increase/decrease book value and book value
per share. Comprehensive earnings, in this case, includes net income from the Income
Statement, foreign exchange translation changes to Balance Sheet items, accounting
changes applied retroactively, and the opportunity cost of options exercised.
New share issues and dilution
The issue of more shares does not necessarily decrease the value of the current owner.
While it is correct that when the number of shares is doubled the EPS will be cut in half, it
is too simple to be the full story. It all depends on how much was paid for the new shares
and what return the new capital earns once invested.
Net book value of long-term assets
Book value is often used interchangeably with "net book value" or "carrying value," which
is the original acquisition cost less accumulated depreciation, depletion or amortization.
2. Adjusted Book Value: Adjusted Book Value can be defined as the book value on a company's
balance sheet after assets and liabilities are adjusted to market value. It is also called
modified book value.
The value of some assets, such as buildings, equipment and furniture/fixtures, may be
overstated on the books, and may not reflect the maintenance and/or replacement costs
for older assets. As a result, some business valuation experts will use an adjusted book
value.
3. Liquidation Value: Liquidation literally means turning a business's assets into readily
available cash. This approach is similar to the book valuation method, except that the
value of assets at liquidation is used instead of the book or market value of the assets.
Using this approach, the liabilities of the business are deducted from the liquidation value
of the assets to determine the liquidation value of the business. The overall value of a
business using this method should be lower than a valuation reached using the standard
book or adjusted book methods.
4. Replacement Value: The term replacement cost or replacement value refers to the amount
that an entity would have to pay, at the present time, to replace any one of its assets.
Replacement value includes not only the cost of acquiring or replicating the property, but
also all the relevant costs associated with replacement. These other costs may include all
applicable taxes and duties, framing and transportation.

5.2 Dividend Discount Model

A difficult problem in using the dividend valuation model is the timing of cash flows from
dividends. Since equity shares have no finite measure, the investor must forecast all future
dividends. This might imply a forecast of intently long stream of dividends. Clearly, this would
be almost impossible. And therefore, in order to manage the problem, assumptions are made
with regard to the future growth of the dividend of the immediately previous period available
at the time the investor wants to determine the intrinsic value of his/her equity shares. The
assumptions can be:

1. Dividends do not grow in future, i.e., the constant or zero growth assumption.
2. Dividends grow at a constant rate in future, i.e., the constant assumption.
3. Dividends grow at varying rates in the future time period, i.e., multiple growth assumption.
The dividend valuation model is now discussed with these assumptions.

150 LOVELY PROFESSIONAL UNIVERSITY