The valuation of ordinary shares is more complicated than the valuation of bonds and preference shares. Explain the factors that complicate the valuation of ordinary shares.

CPA-Financial-Management-Section-3 Revision kit

Valuation of ordinary shares is more complicated than valuation of bonds and preference shares because of:

  • Uncertainty of dividend unlike interest charges and preference dividends which are certain
  • The data for valuation of ordinary shares is historical which may not reflect future expectations.
  • A constant stream of dividends per share is assume
  • The growth rate is assumed constant and is computed from past dividends.
  • The cost of equity/required rate of return on equity is assumed to be constant though it changes over time.

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