Question

According to you why it is more difficult to value ordinary shares than bonds? Explain why.

Answer 1

It is more difficult to value ordinary share than Bonds because of following reasons-

A. Ordinary share will not be having the security of getting repaired back like bondholders so they will be valued according to the current market price of securities

B. There will be a high degree of estimation in regards to the growth rate of the company and the Earning per share of the company in the future.

C. there will be constant changes in the economic environment like interest rate and inflation which will be diminishing the rate of return which will have to be discounted in the intrinsic valuation

D. There is a relative valuation concept which can be highly delusional because each company in the industries not equal

E. bonds are having fixed repayment whereas shares will not be having such privilege in case of dividend so all such estimation about the earning of the company should be discounted in advance

F. There is no certainty about certainty of cash flow and certainty of the income of the company's so it will have to be discounted in advance

G. Performance of the company in various economic situations should be discounted while valuation of stocks, because there will be adverse economic situations like recessions which is to be discounted.