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Any Asset Can be Valued
You have a flat in Indira Nagar, Bangalore.
At what price will you sell it?
You have a restaurant in M G Road. Howwill you value it?
Two ways of valuing an asset:
Relative Valuation DCF Valuation
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Valuing a Stock
What do you get by buying a share? Dividend
Appreciation in Price (Capital gains)
Suppose, you expect a return of 10% from a stock.
The stock is expected to give a dividend of Rs.4 nextyear. It is also expected to trade at Rs.106 next year. What price should you be willing to pay for the stock?
Suppose you expect a dividend of D1 per share nextyear and are expecting to sell the stock at P1 next
year. If the required rate of return is r, how muchshould you be willing to pay for the stock?
In general, the stock price will be the present value ofall dividends.
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Case of Constant Growth Rate
Why should there be some growth in all thestocks?
Suppose, the dividend is expected to increase atthe rate of g per annum. The implied stock valueper share is given by: D1/(r-g).
Suppose, you think Bajaj Auto will be able toincrease its dividend at the rate of 5% a year. Howmuch price will you be willing to pay for it?
The implied value per share = 22*1.05/(0.1505-0.05) = Rs.230
What are the implications?
What growth rate would you expect if the price ofRs.700 is to be justified?
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Two stage Growth Model
Lets assume that the dividend of Bajaj
Auto will increase at the rate of 10% for
the next five years and then will fall to 5%.How much price will you pay for the stock?
In general, now there can be a n-period
growth model.
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Lets value Wall-Mart (WMT)
What is Earnings
per Share (EPS?
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HR Accounting (HRA)
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Lev and Schwartz Model
E(Vj) =expected value of an individuals human
capital
I(t) = persons annual earning in year t
i= discount rate specific to the person
The individual is r years old, and is expected to
retire in year T.
,)1(
)()(
1!
!T
rtrtj
i
tIVE
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Critique of Lev and Schwartzs Model
Earnings and not profit used.
An employee may leave the company
before retirement. There may be a change in role.
Brand Value and HR Value mixed up.
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Modified Lev and Schwartzs Model
Here, P(t) is the probability that the
individual does not die
!
v!
T
rt
rt
i
tPtI1
)1(
)()(
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Example
Year i
er ice
r f
t i
T tal
salar
Expecte
alar
rese t
al e
.9 .
. 9 .
. .
. 9 .
. .
T tal al e
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Flamholtz Model for Valuing Human
Resources
Value: Present worth of the set of services
the person is expected to provide during
the period he or she is expected to remain
in the organization
Key Difference between Flamholtz Model
and Lev and Schwartz Model
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Terminology
Expected Conditional Value
It is the present worth of the potential services
that could be rendered to the organization
assuming the individual maintains a
relationship with the organization.
Expected Realizable Value
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Example
Service
States
Value Probability
1 (transfer) 7800 0.1
2 (same) 9700 0.5
3 (promote) 15100 0.3
Exit 0 0.1
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Expected Conditional Value
Four possible Service Sets
Remain in present position
Being transferred to a different office Being promoted to the next higher level
Leaving the firm
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Steps in Valuing Human Resources
Define the mutually exclusive set of states that anindividual may occupy in an organization
Determine the value in each state
Estimate the persons expected tenure in the company Find the probability that a person will occupy each
possible state
Discount the expected future cash flows to find thepresent value
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Valuation equation
!
!
!n
tt
m
i
ii
r
RPR
C1
1
1
)1(
)(*
)(
Ri is the value to be derived in service state i (there are m states
P(Ri) is the probability
t is time
m possible states
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Example
Service
States
Value Probability
1 (transfer) 7800 0.1
2 (same) 9700 0.5
3 (promote) 15100 0.3
Exit 0 0.1
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Estimation Issues
Service State Values
Expected Service Life
Mobility Probability
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Finding Mobility Probabilities
T+1
T
Senior Semi-senior
Assistant
Exit Total
Senior 30 0 0 20 50
Semi-Sr
20 20 0 20 60
Assistant
0 20 10 10 40
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Other Models
Historical Cost Method
Opportunity Cost Method
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HRA in India
BHEL
SAIL
Infosys Reliance
Satyam