Valuation Techniques in Financial Management

Financial Management

QUESTION 2
a) Price earnings ratio (PER)
The PE ratio is one of the valuation methods which looks at the relation between the
stock price of the organization and its earnings. With the help of this ratio, the investors get
an insight about the willingness of the market in regard to paying for the company’s earnings.
This is determined by using the current share price of the company and dividing it by
earnings per share (Waryati, Widiyanti and Isparwati, 2019). For example, if a business entity
is at present is trading at $20 per share and its net income throughout the utmost recent years
is at $1.20 per share, then the resultant PER for the stock would be 16.67 ($20/$1.20). As the
PER rises up, it shows that current financial investors notion is great or in the favourable
terms. A dropping PER means that the organization is undesirable and unfavourable in
respect to the investors point of view.
Computation of valuation of the company using price earnings ratio
Particulars Formula Amount
(in £m)
Distributable earnings 40.4
Numbers of shares outstanding 147
Market price per share (MPS) 3.89
Earnings per share (EPS)
Price earnings ratio of Aztec (MPS/EPS) 18.52
EPS of the Trojan 0.27
Value of the shares of Trojan (PER of Aztec * EPS of Trojan) 5.0004
Determining the market
value Trojan plc
= Value of the shares of Trojan * Numbers of
shares outstanding
= 5.0004 * 147 735.0588
b) Dividend valuation method
The Dividend Growth Model (DGM) provides an assistance to the potential
investors to decide the intrinsic estimation of a stock value which is dependent on the steady
pace of growth of its future profits. In simple terms, this valuation model uses an
organization's expected rate of return along with its dividend growth rate to determine the
reasonable cost of its stock (Rambaccussing and Power, 2018). Under the DGM, assessing
the future dividend of an organization could be an intricate task since dividend pay-outs of

organizations may change because of different factors, for example, economic situations,
benefit, etc. The DGM varies from the DDM in that it accepts a steady and constant rate of
growth of dividend. DGM is helpful in investigating the estimation of stable organizations
with great income and consistent profit growth rates. Yet, truly, it is hard for organizations to
accomplish a consistent growth rate because of different extraneous elements that influence
their gainfulness and growth.
Computation of valuation of the company using Dividend valuation
method
Particulars Formula Amount (in
£m)
Information provided:
Latest dividend payment (Current dividend) 0.13
Growth rate (GR)
= 0.10(1+g)
^5 = 0.13 5.00%
0.05
Risk free rate (Rf) 5.00%
Beta (β) 1.10%
Number of shares 147
Return on market (Rm) 11.00%
For determining expected rate of return (K),
CAPM model will be used
According to CAPM, K is = Rf + (Rm-
Rf) β
=5% + (11%
- 5%) * 1.1% 5.07%
Market value per share
= 0.13 *
(1+5%)/
(5.07%-5%)
195
Evaluating the market value Trojan plc
= Market
price per
share *
Number of
shares
28665