Lecture 18 Flashcards
(13 cards)
What is share valuation?
Intrinsic valuation – based on unexpected cash flows and risk
Relative valuation – compares similar assets/companies
Contingent valuation – value depends on future event e.g. options 
Intrinsic valuation – Gordon growth model
Used to value shares based unexpected dividend growth
Ownership and dilution
Dilution = original shareholder now own less percentage of the company 
Share premium formula
Check premium = (price paid/ nominal value) -1
right issued definition
Existing shareholders off of new shares (often at a discount) to maintain ownership percentage 
What does the R and Gordon growth model represent?
Required rate of return (cost of equity)
What’s shared dilution?
When new shares are issued, reducing existing shareholders percentage ownership
What happens to share value when new equity is issued at par
Value pia typically falls due to dilution, even though total value increases
What share premium?
Amount paid above the nominal value when issuing new shares 
How can original shareholders avoid dilution
By participating in a right issue
What is intrinsic share valuation based on? 
Discounted cash flows (dividends, earnings)
What kind of evaluation would you use for land or art?
Relative or contingent valuation, not intrinsic
What’s the purpose of share valuation in practice?
To inform investment decisions, raised capital or evaluate performance
