FINANCIAL MANAGEMENT

UNIT-I
1

Introduction
2

Financial Management
It can be defined as the management of the flow of funds and it
deals with the financial decision making.
It encompasses the procurement of funds in the most economic
and prudent manner and employment of these funds in the
most optimum way to maximize the return for the owner.

Finance: As an area of study

3

Financial management of Trading or Manufacturing firms

Financial management of Financial Institutions
Financial activities relating to Investment management
International finance
Public finance

Scope
4
Investment decisions includes investment in fixed assets (called as capital budgeting).

Investment in current assets are also a part of investment decisions called as working
capital decisions.
Financial decisions - They relate to the raising of finance from various resources
which will depend upon decision on type of source, period of financing, cost of
financing and the returns thereby.
Dividend decision - The finance manager has to take decision with regards to the net
profit distribution. Net profits are generally divided into two:
Dividend for shareholders- Dividend and the rate of it has to be decided.
Retained profits- Amount of retained profits has to be finalized which will depend upon
expansion and diversification plans of the enterprise.

Objectives of Financial decision making

5

Maximization of the profits of the firm

Profit Vs. Wealth Maximization

6

Wealth Maximization versus Profit Maximization

Timing profit maximization does not take into account the timing of
earnings, while wealth maximization does.

Risk wealth maximization takes risk into account profit maximization

does not.

Dividend payments if profit maximization was the goal, a firm would

never pay dividends.

Qualitative factors profit maximization does not take into account future
activities such as sales growth, stability and diversification.

Stock price maximization since investors want to maximize their own

wealth, they prefer the firm adopt strategies that will maximize stock price.

Liquidity Vs Profitability
7

Profitability
It is the relationship between profits and capital.
Measuring profitability means that you have to relate a profit figure (from

the Profit and Loss Account) to a resources figure (from the Balance Sheet).
In short, profit is the measure of gain, and profitability the relation of this
gain to the firm's assets.

Liquidity
It may be defined as the ability of a firm to meet its financial obligations as

they fall due. The balance sheet (defined as "a structured statement of assets
and liabilities")measures these resources and claims, and describes the
liquidity of the firm i.e. the relationship between assets and liabilities.

Methods of Financial Management,

8
Methods and tools of

financial management are needed for financing, investment.

1. Tools of Financial Management for Financing

A ) Financial Leverage
In this tool, finance manager fixes his need of financing. Over and low financing estimation may be harmful
for company. Optimum loan requirement is fixed with financial leverage tool. Learn about it at here.
B) Selection Best Source of Finance
In this tool, finance manager analyze different source of financing. He check their rates, repayment terms
and other conditions and then choose best option.
2. Tools of Financial Management for Investing Decision
These tools are used to know which is best alternative of investment. Will this alternative give us best return
at minimum risk. Capital budgeting, internal rate of return, net present value. In the area of investment in
current assets, we use working capital management.

Organization of Finance Function

9

Board of Directors
President
VP Marketing

VP Production

VP Finance

Chief Finance
Manager (Controller)
Tax Manager
Cost Accounting
Manager

VP HR

Chief Finance
Manager (Treasurer)

Financial Accounting Manager

Cash Manager

Capital Expenditure Mgr

Data Processing
Manager

Credit Collection Mgr

Appraisal of
Reporting

Portfolio Manager

Appraisal of
Reporting
10

11

Sources of Financing

Classification of Sources of Finance

12

In the market, there are several sources of finance, with conflicting risk

characteristics and with conflicting cost structures. Numerous management

experts have tried to categorize them into numerous categories based on
the time factor, source of generation, ownership pattern, and convenience.
The resulting classification of finance is as follows:
On the basis of ownership - own capital and borrowed capital
On the basis of period - long term, medium term and short term
On the basis of convenience - security financing (shares, debentures
etc),Internal financing (Depreciation funds, retained earnings, reserves
etc), Loan Financing (short term loans, medium term loans and long term
loans)
On the basis of source of generation - internal sources and external
sources

Loan Financing
13

A method of financing in which a company receives a loan and gives

its promise to repay the loan .

Debt financing includes both secured and unsecured loans. Security
involves a form of collateral as an assurance the loan will be repaid.
If the debtor defaults on the loan, that collateral is forfeited to satisfy
payment of the debt. Most lenders will ask for some sort of security on
a loan. Few, if any, will lend you money based on your name or idea
alone.
The special features of the loan are
1. Security
2. Interest rate
3. Repayment of loans
4. Restrictive provisions

Project Financing
14

The financing of long-term infrastructure, industrial projects and

public services based upon a non-recourse or limited recourse

financial structure where project debt and equity used to finance
the project are paid back from the cash flow generated by the
project.
In other words, project financing is a loan structure that relies
primarily on the project's cash flow for repayment, with the
project's assets, rights, and interests held as secondary security or
collateral.

Loan Syndication
15

A practice in which several banks each lend an amount of money to a

borrower at the same time and for the same purpose. The banks
participating in the loan syndication cooperate with each other for the
duration of the project, even if they are otherwise competitors. Bank
syndicates usually only lend large amounts of money that the individual
banks could not afford easily. Loan syndication is a temporary
arrangement between the banks. See also: Syndicate.
Benefits of Syndicated Loans
Improving financial soundness
Enhances flexibility of financing
Streamlining treasury & accounting departments
Increasing adding value in addition to meet financing needs

Security Financing
16

Securities financing
The ability to borrow or lend cash or securities against collateral. This is
done for purposes of enhancing yield, settlement, or other strategic
purposes. Liquidity can be provided against a wide range of investment
vehicles including stocks, bonds, and exchange traded funds.
Certain firms need to borrow securities in order to cover their settlement
obligations in the event of failed trades or taking short positions, or to take
advantage of arbitrage and other opportunities. Institutions with large portfolios
of securities are attractive to securities borrowers.
Accordingly, global custodians provide securities lending services, typically with
the custodian as agent matching its clients with approved borrowers. The
custodian oversees the posting of collateral by the borrower, collects dividends
and other economic benefits for the lender during the life of each loan and shares
in the lending fee payable by the borrower. The lender can terminate a loan at any
time,
generally
with
recall
notice
of
three
business
days.

Book Building
17

Book building is a process of generating, capturing, and recording

investor demand for shares during an initial public offering (IPO), or

other securities during their issuance process, in order to support
efficient price discovery. Usually, the issuer appoints a major
investment bank to act as a major securities underwriter or book runner.
Book Building is an alternative method of making a public issue in
which applications are accepted from large buyers such as financial
institutions, corporations or high net-worth individual, almost on firm
allotment basis, instead of asking them to apply in public offer.

Nominate Book Runner

Form syndicate of Brokers, , underwriters, financial institutions etc.
Submit draft offer document to SEBI without mentioning coupon rate
Circulate offer document among syndicate members
Ask for bids on price
Aggregate and forward all offers to book runner
Run the book to maintain a record of subscribers and their orders
Consult with issuer and determine the issue price
Firm up underwriting commission
Allot securities among syndicated members
Securities issued and listed
Commencement of trading on exchanges
18

Financial Institutions
19

A financial institution is an institution that provides

financial services for its clients or members.

Act as financial intermediaries.

OBJECTIVE OF FINANCIAL INSITUTIONS

20

To transform financial assets acquired through the market and

constitute them into a different, and more widely preferable, type of

asset-which becomes their liability.
This is the function performed by financial intermediaries, the most
important type of financial institution.
To exchange financial assets on behalf of customers.
To exchange of financial assets for their own accounts.
To assist in the creation of financial assets for their customers, and then
selling those financial assets to other market participants.
To provide investment advice to other market participants.
To manage the portfolios of other market participants.

Examples of financial institutions

21

Banks
Stock
Brokerage Firms
Non Banking Financial Institutions
Asset Management Firms
Credit Unions
Insurance Companies

OVERVIEW
OF IMPORTANT FINANCIAL INSTITUTIONS

22

There are various kinds of financial institutions performing

their role in financial intermediation and infrastructural

development, differing on the basis of their inception and
operations.
Broadly, the existing financial institutions may be classified as
(a) All India institutions like Industrial Development Bank of
India (lDBI), Industrial Finance Corporation of India (IFCI)
etc.,of India (IFCI) etc.,
(b) Regional/State level institutions like the StateFinancial
Corporation (SFC) etc.

23

Instruments

Financial Instruments
Financial Instruments: The written legal
obligation of one party to transfer something of
value, usually money, to another party at some
future date, under certain conditions.

The enforceability of the obligation is important.

Financial instruments obligate one party (person, company,
or government) to transfer something to another party.
Financial instruments specify payment will be made at some
future date.
Financial instruments specify certain conditions under
which a payment will be made.

3-24

Uses of Financial Instruments

Three functions:

Financial instruments act as a means of payment (like money).

Employees take stock options as payment for working.
Financial instruments act as stores of value (like money).
Financial instruments generate increases in wealth that are
larger than from holding money.
Financial instruments allow for the transfer of risk (unlike
money).
Futures and insurance contracts allows one person to transfer
risk to another.

3-25

The most common examples of financial instruments

26
Loans and Bonds. A lender gives money to a borrower in exchange for regular

payments of interest and principal.

Share/Stocks. A company sells ownership interests in the form of stock to
buyers of the stock.
Debenture: A type of debt instrument that is not secured by physical assets or
collateral. Debentures are backed only by the general creditworthiness and
reputation of the issuer. Both corporations and governments frequently issue
this type of bond in order to secure capital.
Funds.
Includes mutual funds, exchange-traded funds,
real estate investment trusts, hedge funds, and many other funds. The fund buys
other securities earning interest and capital gains which increases the share
price of the fund. Investors of the fund may also receive interest payments.
Insurance. Insurance contracts promise to pay for a loss event in exchange for
a premium. For instance, a car owner buys car insurance so that he will be
compensated for a financial loss that occurs as the result of an accident.

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Options and Futures. Options and futures are bought and sold either for

capital gains or to limit risk. For instance, the holder of XYZ stock may buy a put,
which gives the holder of the put the right to sell XYZ stock for a specific price,
called the strike price. Hence, the put increases in value as the underlying stock
declines. The seller of the put receives money, called the premium, for the
promise to buy XYZ stock at the strike price before the expiration date if the put
buyer exercises her rights. The put seller, of course, hopes that the stock stays
above the strike price so that the put expires worthless. In this case, the put seller
gets to keep the premium as a capital gain.
Currency. Currency trading, likewise, is done for capital gains or to offset risk.
It can also be used to earn interest, as is done in the carry trade. For instance, if a
trader believed that the Euro was going to decline with respect to the United
States dollar, then he could buy dollars with Euros, which is the same thing as
selling Euros for dollars. If the Euro does decline with the respect to the dollar,
then the trader can close the position by buying more Euros with the dollars
received in the opening trade.

Depositories
28

DEFINITION of 'Depository' On the simplest level, depository is used to

refer to any place where something is deposited for storage or security

purposes. More specifically, it can refer to a company, bank or an
institution that holds and facilitates the exchange of securities.
Investor used to hold the securities in the form of physical certificate which
has their own disadvantages and to take a control over the irregularities of
the capital market for the protection of an investor`s interest, Depository
system has been introduced in India where the securities could be handled
in an electronic form by the process of dematerialisation.
Dematerialisation or Demat Account is an account that holds the
investors securities such as shares, debentures, mutual fund etc in a
dematerialised or an electronic form. A buy transaction will result in a
credit entry while a sell transaction leads to debit entry in a demat account.

CONTD..
29

Function of Depository:
One of the main function of the Depository is to transfer the ownership of shares from
one investor`s account to another investor`s account whenever the trade takes place. It
helps in reducing the paper work involved in trade, expedites the transfer and reduces the
risk associated with physical shares such as damaged, theft, interceptions and subsequent
misuse of the certificates or fake securities.
Another important function of depository is that it eliminate the risk associated with
holding the securities in a physical form like loss,damage,theft or delay in deliveries etc.
Depositories in India:
We have 2 depositories in India which are well known as NSDL (National securities
depository limited) and CDSL (Central Depository Services (India) Limited). They
interface with the investors through their agents called Depository participants (DPs).
DPs could be the banks (private, public and foreign), financial institutions and Sebiregistered trading members.

Factoring
30

Meaning:

It is the oldest form of financial service relating to management and

financing of debts offered by financial institutions. Here a company sells
its accounts receivables at a discount to a factor, which then assumes the
credit risk of the debtors and receives cash as the debtors settle their
accounts.
Features of Factoring:
1. It is very costly.
2. In factoring there are three parties: The seller, the debtor and the factor.
3. It helps to generate an immediate inflow of cash.
4. Here the full liability of debtor has been assumed by the factor.
5. Factor has the right to take any legal action required to recover the debts.

Types of Factoring
31

With recourse Factoring: the factor does not take any

credit risk which is associated with receivables.

Without Recourse Factoring: It means that the factor
has to bear all losses that arise out of irrevocable
receivables.

CONTD..
32

Advantages of Factoring:
The company receives advance payment from the factor which improves
its immediate cash inflows.
Factoring does not require to chase the debtors for collecting outstanding
amount and consequently the management may concentrate on other
important issues.
Disadvantages of Factoring:

i. It is very costly, as a huge discount is to be paid to the factor.

ii. Factors may adopt some harsh techniques for the recovery of debt which
is not always acceptable to the debtors and ultimately the relationship
between company and debtors deteriorates.
iii. Factors only purchase the invoices of a reputed company; a new
company does not get the benefit of factoring.

Venture Capital
33

Meaning:
This is a very important source of financing for a new business. Here

money is provided by investors to start a business that has strong

potentiality of high growth and profitability. The provider of venture
capital also provides managerial and technical support .
Venture capital is also known as risk capital.
Venture capital is significant innovation of the 20 th century. It is
generally considered as synonym of risky capital.
It is a new financial service, the emergence of which wants towards
developing strategies to help a new class of entrepreneurs to translate
their business ideas into realties.

Features of Venture Capital:

34

1. Venture capital investments are made in innovative projects.

2. Benefits from such investments may be realized in the long run.
3. Suppliers of venture

capital invest money in the form of

equity capital.
4. As investment is made through equity capital, the suppliers of venture capital
participate in the management of the company.

5. High risk

35

36

Contd..
37

Advantages of Venture Capital:

i. New innovative projects are financed through venture capital which

generally offers high profitability in long run.
ii. In addition to capital, venture capital provides valuable information,
resources, technical assistance, etc., to make a business successful.
Disadvantages of Venture Capital:

i. It is an uncertain form of financing.

ii. Benefit from such financing can be realized in long run only.
Example of Venture Capital Companies

IFCI Venture Capital Funds, Incube Connect Fund, Ojas Venture Partners
Reliance Venture etc.

Credit Rating
38

A credit rating assesses the credit worthiness of an individual,

corporation, or even a country. It tells a lender or investor the probability

of the subject being able to pay back a loan.
Credit ratings are calculated from financial history and current assets and
liabilities. The ratings are expressed in code numbers which can be
easily comprehended by the lay investors.
A poor credit rating indicates a high risk of defaulting on a loan, and thus
leads to high interest rates. Credit rating, as exists in India, is done for a
specific security and not for a company as a whole. A debt rating is not
one time evaluation of credit risk, which can be regarded as valid for the
entire life of the security.
Credit Rating agencies are regulated by the SEBI and registration with
SEBI is mandatory for such credit rating agencies.

BENEFITS OF CREDIT RATING

39
For Investors
Safeguards against bankruptcy Recognition of risk Credibility of the issuer Easy
understandability (ratings) of the investment proposal Savings of resources (time and
money) Independence of investment and quick investment decision Choice of
investments Good bye to thumb rules Benefits of rating surveillance Low cost information
For Rated Companies
Low cost of borrowing Wider audience for borrowing
(Increase the investor population)
Rating as a marketing tool Self discipline by companies
(Encourages financial Discipline)
Reduction of cost in public issues
(attract investors with least efforts)
Motivation for growth Sources of additional certification Forewarns (caution)
risk Merchant bankers job made easy Foreign collaborations made easy
For Brokers and financial intermediaries
Saves time, money, energy, and manpower in convincing their clients about investments. Less
effort in studying companys credit position to convince their clients. Easy to select profitable
investment security Helps to improve business

CREDIT RATING AGENCIES IN INDIA

40

1. Credit Rating Information Services Limited (CRISIL)

2. Investment Information and Credit Rating Agency of India

(ICRA)
3. Credit Analysis and research (CARE)
4.Duff Phelps Credit Rating Pvt. Ltd. (DCR India) and
5.Onicra Credit Rating Agency of India Limited

Commercial Paper
41

Commercial paper is a short term, unsecured license promissory note issued at

a discount to face value by well known or reputed companies, who carry a

high credit rating and have a strong financial background.
It is an unsecured obligation issued by a bank or corporation to finance its

short-term credit requirements like accounts receivable and

inventories and it is usually issued at a discount reflecting the prevailing
market interest rates.
An unsecured, short-term debt instrument issued by a corporation, typically
for the financing of accounts receivable, inventories and meeting short-term
liabilities. Maturities on commercial paper rarely range any longer than
270days. The debt is usually issued at a discount, reflecting prevailing market
interest rates.

42

43

Certificate of Deposit
44
Introduced in 1989 in India.
a certificate issued by a bank to a person depositing money for a specified length of time at

a specified rate of interest.

Fixed interest rates and fixed tenure instruments issued by banks and financial institutions.
Safe way to make investments for a short or medium period of time (maturity of 9o0 days)
Offers a term-based assured return to the owner.
The minimum issue of CDs to single investor is rupees 10 lakhs & can be further issued in

multiple of Rs. 5 lakhs.

Contd..
45
Advantages of CDs

Offer a higher rate of interest than savings account .

Return on investment is ensured despite the rate fluctuations in the market.

Disadvantages of CDs

As the rate of interest is fixed, it is difficult to change or to take advantage of the market
situation when the market rates are favorable.

46

Stock Invest
47
Stocks are an equity investment that represents part ownership in a

corporation and entitles you to part of that corporation's earnings and assets.
Common stock gives shareholders voting rights but no guarantee of dividend
payments.
A type of security that signifies ownership in a corporation and represents a
claim on part of the corporation's assets and earnings.
There are two main types of stock:

common and preferred. Common

stock usually entitles the owner to vote at shareholders' meetings and to receive
dividends. Preferred stock generally does not have voting rights, but has a
higher claim on assets and earnings than the common shares. For example,
owners of preferred stock receive dividends before common shareholders and
have priority in the event that a company goes bankrupt and is liquidated.

Global Depository Receipts

48

A bank certificate issued in more than one country for shares in a

foreign company
Offered for sale globally through the various bank branches
Shares trade as domestic shares
A financial instrument used by private markets to raise capital
denominated in either US Dollars or Euros.
The voting rights of the shares are exercised by the Depository as per
the understanding between the issuing company and the GDR holders.
GDR Listing: London stock exchange, Luxembourg stock exchange,
Singapore exchange, Hongkong Exchange.
Example of the Companies who have issued GDR: Bajaj Auto,
HDFC Bank, ITC, L&T, Infosys, Tata Motors etc.

49

GDR Advantages & Disadvantages

50

GDRs allow investors to invest in foreign companies

without worrying about foreign trade practices, law etc.

GDRs are liquid because they are based on demand and
supply which is regulated by creating/ cancelling the
shares.
GDRs suffer from foreign exchange risk i.e. currency of
issuer is different from currency of GDR.

51

TIME VALUE OF MONEY

Concept
52

The concept of TVM refers to the fact that the money

received today is different in its worth from the

money receivable at some other time in the future.
Worth of Money receivable in future < Worth of Money received today.

Reasons for time preference of money:

Future uncertainties
2. Preference for present consumption
3. Reinvestment opportunities.
1.

53

Rs. 1,00,000----- (Adjustment)---- > Rs. 1,25,000

Rs. 1,00,000<----- (Adjustment)---- - Rs. 1,25,000

T0 ----------------------------------------------------------------- T1

Compounding Technique
54

Compounding technique is used to find out the FV of a

present money. Concept is same as of the compound

interest.
The future value of a single present cash flow:
FV = PV (1 + r)n
FV= PV x CVF

(r, n)

The future value of a series of Equal Cash flows or Annuity of cash flows:
FV = Annuity Amount X CVAF

(r, n)

Questions
55

A company is offered a contract which has the following terms: an

immediate cash outlay of Rs. 15000 and followed by a cash inflow
of Rs. 17,900 after 3 years. What is the companys rate of return on
this contract.
2. A four year annuity of Rs. 3000 per year is deposited in a bank
account that pays 9% interest compounded yearly. What is the FV
of the annuity.
3. In setting up an educational fund, a person agrees to make five
annual payments of Rs. 5000 each into a college fund
programme. The first payment is to be made 12 years from now
and the college fund programme wishes that upon making the
last payment, the amount available should have grown to Rs.
30,000. What should be the minimum rate of return on this fund?
1.

Discounting Technique
56

The future value of a single present cash flow:

PV = FV/ (1 + r)n
PV = FVx PVF(r, n)

The future value of a series of Equal Cash flows or Annuity of cash flows:
PV= Annuity Amount X PVAF

(r, n)

Questions
57

1.

2.
3.

A student is awarded a scholarship and 2 options are placed before

him (I) to receive Rs. 1100 now or (ii) receive Rs. 100 pm at the end
of each of the next 12 years. Which option be chosen if the rate of
interest is 12% pa.
Mr. Subhash deposits Rs. 5,00,000 annually for 5 years. What is the
present value of the annuity if the discount rate is 10%.
Rs. 1000 is deposited into an interest bearing account that pays 10%
interest compunded yearly.

Present Value of Annuity Due

58

PV = Annuity x PVAF(r, n) (1+r)

Questions
59

Mr. Subhash decides to deposit Rs.1,00,000 every

year in the beginning of each year for 5 years @12%

rate of return. What is the present value of the
annuity.

Perpetuity
60

A perpetuity may be defined as an infinite series of equal

cash flows occurring at regular intervals.
PV = Annual cash flow/ r
Present Value of Growing Perpetuity

Question
61

1. Find out the present value of an investment which is

expected to give a return of Rs. 2500 p.a. indefinitely
and the rate of interest is 12%pa.

Valuation of
Securities

Valuation of Securities
Time

value of money through its compounding and

discounting techniques is applied for valuation of securities.
A financial asset has two important forms of return:
(i) Returns in the form of interest on fixed securities and
dividends on equity shares.
(ii) The value of an asset at the time of sale or at the time of
termination.

Valuation of Securities
1. Bond Valuation
2. Debenture Valuation
3. Preference Share Capital Valuation
4. Equity Share Capital Valuation

BOND
A bond is a financial asset in which borrower pays

interest on the principal sum for a defined period of time

to the holder of the bond.
It is a long term contract and has a fixed rate of interest
and a date of termination.
Government bonds are risk free but corporate and foreign
bonds have a high default risk.

Method 1:
B0 = I (PVAFr,i) + RV (PVFr,i)

Q1: The face value of the bond is Rs. 10,000. it is redeemable

after 10 years. The bond is currently selling for Rs. 10,500 and
the coupon rate is 10%.
Two investors Mohit and Mridul want to buy this bond. Mohits
required rate of return is 12% and Mridul is 13%. What should
be the value of the bond according to investors requirements?
Q2: A bond of Rs. 10,000 has a coupon rate of 10% pa is payable
half yearly. Find the value of the bond if it is redeemed in 8
years and the investors required rate of return is 12%.

Method 2:
Yield to Maturity (YTM)
YTM = I+ (RV- Bo)/n
(RV+Bo)/2
Where, I = Interest
Rv= Redemption Value
Bo= Bond Value
N= No. of years.

Or,

Bo= I (PVAF) + RV (PVF)

YTM of a bond is the rate of return or cost of debt that makes the
discounted values of cash flows equal to the bonds market value. The
yield to maturity is the internal rate of return at a given level of risk.

Contd
Q: 3 A bond carries a 10% coupon rate and matures after 7
years has the market value of Rs.9800. the par value of the
bond is Rs.10,000. what would be the rate of return of the
investor if he buys this bond & holds it till maturity?

Valuation of Preference Shares

These resemble bonds because there is a fixed return on

bonds the return is called interest whereas in preference

shares it is a dividend.
Irredeemable preference shares

Po= D/Kp
Redeemable preference shares

Po= D (PVAF) + RV (PVF)

Q:4. ABC Ltd. issues 15% preference shares of the face

value of Rs.100 each at a flotation cost of 4%. Find
out the cost of preference shares if the preference
shares are irredeemable.

Valuation of Equity Shares

Method 1: Zero growth in dividends

Po= D/Ke
Q: a company declared a dividend of Rs.6. find the value of
the share if the expected rate of return of the investor is
10% and dividend is expected to remain the same every
year.

Method 2: Constant growth in dividends

Po= D1/ (Ke- g)

Q: A share that has a face value of Re. 1 is expected to pay a
dividend of 20% at the end of the year1. its growth rate in
dividends is estimated to be 8%. If the investor has a
required rate of return of 12%, what would be the value of
equity shares?

EPS= (PAT- Pref Dividend)/ No. of equity shares

Method 3: Valuation of shares based on earnings
Q: the capital structure of the company is given below:
Equity share capital Rs 850,00,000
Share premium Rs 45,00,000
Reserves = Rs 1,00,00,000
The profit after tax is Rs 5,00,00,000 and the face value of
share is Rs.2. . Find out the value of share.

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