A business can be valued by capitalizing its earnings stream (see example 6.15 in your textbook). 

• How might you use the same idea to value securities, especially the stock of large publicly held companies? 
• Is there a way to calculate a value that could be compared to the stock's market price that would tell an investor whether it's a good buy? (If the market price is lower than the calculated value, the stock is a bargain.) 
• What financial figures associated with shares of stock might be used in the calculation. Consider the per share figures and ratios discussed in chapter 3 including EPS, dividends, book value per share etc. 
• Does one measure make more sense than the others? 
• What factors would make a stock worth more or less than your calculated value?

A BUSINESS CAN BE VALUED BY CAPITALIZING ITS EARNINGS STREAM

The business can be valued by capitalizing its earnings stream, one method for which would be DCF (Discounted Cash Flow) model. In this method all the earnings and expenses are discounted at a proper rate to come at free cash flows and discounting them will get the value of firm and subtracting all the debt holders obligations would give us value of equity; and dividing that by no. of shares would give us the value of share.

We can easily value the securities by using this scenerail, majorly used for large cap companies, the data for which is easily available. Now, this method gives us the intrinsic value of the company, comparing that with the stock price of the company will give us an indication whether the stock is undervalued or not. If the intrinsic value is less than the stock value, then the stock is overvalued and hence should be sold and if intrinsic value is more than the stock value, then the stock is undervalued and hence should be bought.

The ratios like EPS, Dividends, and Price to book value can be used to calculate the share value as well. Here by measuring the industry averages with the company values can be used to calculate the stock price. The choice of these parameters would depend on the industry. For eg. Price to book value makes more sense to financial industry and dividends would make more sense to FMCG industry.

The impacts like earnings, growth make a stock worth more or less than the calculated value. The market speculation regarding the stock or company performance would make the stock price vary as compared to the intrinsic value.