How to find a Stock's Right Price?
4.2.2. Valuation for a bank
In case of banks, interest incomes and interest costs are more or less similar across all banks.
As we know bank's business is different than other businesses because all the assets and liabilities are financial in nature. It makes its book value more important than its earnings for its assessment.
Here again, the MRP is determined by two factors
- ‘Present Value of Future Dividends’ – This is the income earned as Dividend during the holding period of a stock, discounted to its present value.
- 'Present Value of Future Price'- Expected stock price at the time of sale, discounted to its present value.
- To calculate MRP, we first need to know the Future Price. Future Price is calculated by the formula
- The Future BVPS is calculated by the formula
Here, it is important to estimate the expected BVPS growth rate for the bank. At MoneyWorks4me, a team of experts analyze the bank past performance & future plan, market share, government policy, industry outlook etc. In the end, after a thorough analysis they come up with an expected BVPS growth rate.
- The Future Price-to-Book Value Ratio is calculated by the team of experts at MoneyWorks4me through a thorough study of the historical trends of P/BV ratios as well as dividends.
- Now that we have done the first part, i.e. calculating the Future Price, we move to the second part in the calculation of MRP which is calculating the Present Value of Future Dividends. Here, the Future Dividends per Share are calculated by a team of experts from MoneyWorks4me and then are discounted at an appropriate rate of discount.
- Now that we know the Future Price and the Present Value of Future Dividend, we go on to calculate the MRP. The MRP, as discussed previously, is calculated on Present Value of Future Dividends and Present Value of Future price. Thus, MRP is calculated by the formula :
- Current BVPS (which is known)
- Expected BVPS Growth rate (which is calculated by the team of experts at MoneyWorks4me)
- Expected Rate of Return (which is calculated by the team of experts at MoneyWorks4me)
- Future P/BV (which is calculated by the team of experts at MoneyWorks4me)
- Present Value of Future Dividend per share (which is calculated by the team of experts at MoneyWorks4me)
- The research includes a thorough quantitative as well as qualitative stock analysis.
- The quantitative equity analysis includes scanning through historical data of each company. This is followed by a study of the future prospects of the company.
- The two combined together with our model based on Expected Book Value growth rate, Future P/BV & dividend discounting helps us derive an MRP & Discount Price for each stock.