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 general, how useful would any information obtained from the industry (i.e. from industry peers) of a company be for the purpose of valuing that company?

Answer 1

Solution:

Though stocks do not promise any fixed cash flow, but they can be valued using various methods-

1. Discounted Cash flow method: This is an intrinsic method of valuation and the industry data can help in getting the information regarding the growth rate and cost of equity.

2. Relative valuation: Relative valuation is one useful method of valuation where the industry information can be used

• P/E ratio: Price / Earning per share. If the PE ratio of the company is less than the industry average then it can be said that the company is undervalued.
• Price / Sales ratio
• P/B ratio

So information from the peers can be useful in evaluating the share price of the company when we do the relative valuation and we will compare the numbers with the industry average