Question

Unlike bonds, stocks do not promise any fixed stream of cash flows to the stockholder. Stocks are thus much more difficult to value because even if a company pays dividends, it is very difficult to estimate future dividend amounts with any degree of certainty.

In what situations would the information obtained from the industry peers of the company be appropriate to use in valuing a company? When would such (industry) information be inappropriate?

In the case where using industry information would be inappropriate for a company, what other information sources/methods can be considered?

Answer 1

Stock Valuation can be done based on the Industry peers and it will be appropriate

1. When there is no company specific requirement with respect to valuation

2.Company is in the same phase of life cycle.

3.This is mostly used method for valuation of stocks by individual investors.

4.This is best method because it is taken from public data and authenticity of information obtained is also reliable.

Stock Valuation cannot be done based on the Industry peers and is required to use discounted cash flows method or walters model.

1.When the life cycle is different from the industry life cycle.

2.Company is going to enter in different field or any specific requirement or change in circumstances.