Empirical Study on Estimation of Value using Constant Dividend Growth (Gordon) Model: With Special Reference to Selected Companies

Abstract

The concept of value is like beauty. Just as it is said, “beauty lies in the eyes of the beholder”. Value is determined by a person who seeks or perceives value in a thing. In analyzing a company, it is not sufficient just to study its past performance. The environment- economic, industrial, social and so on must be understood. Business valuation is important in determining the present value status as well as the future prospects of a company. Dividend and capital structure relevance and irrelevance theories are used to determine value of share despite there are various limitations in practice and truth. Fundamental analysis is perhaps, the most popular method used by investment analysts for assessing value of a stock. The earnings potential and riskiness of a firm are contributing to the prospects of the industry to which it belongs.

Objective of the study is to study the estimation of intrinsic value using Constant Dividend Growth and Capital Structure models of Asian Paints Limited. The study is based on secondary data, discussions with personnel concerned. The secondary data consists of the annual reports of Asian paints Ltd., covering for the last five years from 2007-08 to 2012-13. Various other reports like magazines, journals published books and websites are also referred to for the present study. Tools applied for data analysis in the present study are financial tools like Dividend per share, Return on Equity, Retention Ratio, Earnings per share, Cost of Equity Sustainable Growth Rate and Constant Growth Model, Dividend payout ratio, and statistical tools such as compound Annual Growth Rate (CAGR), Simple Average, and Weighted Average. Detailed analysis could not be carried out for the research work because of the limited time span. Since financial matters are sensitive in nature, same could not be acquired easily.

The conclusion is to know whether it is undervalued or overvalued. The stock is undervalued if the market price of a share is lesser than its intrinsic value. It is preferable to buy it (at cheaper rate) to make profit. On the other hand, the stock is overvalued, if market price of a share is higher than its intrinsic value preferring to sell it now to prevent from losing value subsequently.

Keywords: Cost of Equity, Sustainable Growth rate, Retention Ratio, Return on equity