Determining the value of a preferred share of a Russian company is sometimes quite difficult. This often requires the use of sophisticated techniques. This is due not only to the fact that the Russian securities market is in the development stage, but also to the current economic realities.
Instructions
Step 1
Equity security, or preference share, has such advantages as guaranteed receipt of dividends and part of the value in the event that the joint-stock company is liquidated. But on the other hand, its owner does not have the right to vote at the general meeting, with the exception of some cases stipulated by law. According to their hierarchy, preferred shares occupy an intermediate position between bonds and common shares, these features must be taken into account when assessing their value.
Step 2
Taking into account the specifics of these securities, define their value as the value of future dividend payments, discounted at the appropriate rate. This breaks down the cost determination process into two steps: making a forecast of future dividend payments and calculating the discount rate.
Step 3
For long-term forecasting of cash flows, use the classical methods of statistical and financial analysis based on the results of the activities of a joint-stock company over the past few years. Identify the existing trends in the dynamics of prices and sales, profits and costs in the overall structure of the company's capital. Take into account the one-time, atypical income and expenses. Form the expected cash flows and foresee the development of events according to several scenarios, depending on how the company will conduct its business, taking into account the likely changes in the market. Discount and sum up the value of the current cash flow and its estimated value in the post-forecast period.
Step 4
Determine the discount rate for preferred shares. It is the average rate of all alternative investments with a comparable level of risk. For this type of stock, the rate of raising equity capital is lower than for common stocks, but it will be higher in terms of yield than the value of bonds.
Step 5
Use the WACC model to determine the weighted average rate if the activities and profits of your company are highly predictable, the company has been operating steadily for a long time. If its financial results are extremely unstable and the balance sheet structure is unsatisfactory, the economic situation in the industry is unstable, use the CAPM method, which allows you to qualitatively justify and use different discount rates for common and preferred shares. The cumulative construction method, which takes into account many factors, does not reflect these differences.
