Abstract
The normative or theoretical value of a share is the present value of all future receipts that are received in respect of the ownership of that share. The major receipts that come from the ownership of a share are the quarterly, semi-annual or annual dividend and the proceeds from the sale of the share. Thus the theoretical value of a share today, PVSP is expressed thus:
where D1, 2, 3,… n= dividends in each year, Pn= sale proceeds or any terminal receipt (i.e. the liquidation of the company or takeover consideration), and r = discount rate (i.e. the opportunity cost of making the investment or the rate of return required by the investor, taking into consideration the risk involved and the investor’s other investment opportunities). This discount rate can vary; for example, the rate may increase through time due to increased risk. For the sake of simplicity the impact of tax has been ignored in equation (2.1).
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Notes and References
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© 1977 Michael Firth
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Firth, M. (1977). The Valuation of Stocks and Shares. In: The Valuation of Shares and the Efficient-Markets Theory. Studies in Finance and Accounting. Palgrave, London. https://doi.org/10.1007/978-1-349-15819-5_2
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DOI: https://doi.org/10.1007/978-1-349-15819-5_2
Publisher Name: Palgrave, London
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