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Share Valuation

1.0 Introduction

Any shareholder who made an investment to an establishment expects certain returns whether it is in the form of dividend payment or capital growth or both (Ahn & Leung, 2006). In an efficient market, investors (both existing and potential) are assumed to perceive investment risk to commensurate with the required level of return. They will use available information about the future plans of the company to formulate their expectations about future dividends (Ohlson and Juettner-Narouth, 2005)and capital growth. Thus, the cost of equity is equivalent to the rate of return which investors expect to gain on their equity holdings in relation to the level of risk involved.

On the other hand, the most common reason to have a company or share valuation by investors is when a company requires to raise new funds. New funds raised can then be channelled to either establish a new company, expansion of current operations or undertake a project. A company might raise new funds through capital markets, bank borrowings, government sources and venture capital.

Hence, a company which intends to raise funds through capital market must consider how investors would appraise the company when assessing the returns they can expect in view of the risks they are taking.

1.1 Background

1.1.1 Valuation

The company's value is based on an expectation of its ability to generate future cash flow. The organisation value is the value of the future cash flow that is attributable to both the debt and the equity holders within the business.

1.1.2 Company

Most of the examples and elaboration mentioned in this paper refers to public listed firms with equity quoted or listed in the share market.

1.1.3 Shares or Stock

Shares, stock or securities refers to the equity or ordinary shares of the firm.

Many models and methodologies are available to value a company or its stocks. In fact, it is mentioned that company and shares valuation is an art. There can...