CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance
A share has a current market price of Rs 240 and expected EPS of Rs 16. A peer group in the same industry trades at an average P/E of 12. Based on the peer P/E, what is the estimated fair value, and how does the share look?
The fair value is Rs 192 and the share is overvalued. Multiplying the peer P/E of 12 by expected EPS of Rs 16 gives Rs 192, which is lower than the market price of Rs 240, because the share trades at a P/E of 15.
- ARs 192; overvaluedCorrect
- BRs 192; undervalued
- CRs 240; fairly valued
- DRs 288; undervalued
Explanation
Fair value = peer P/E x EPS = 12 x 16 = Rs 192. Market price of Rs 240 exceeds Rs 192, so the share is overvalued. The current P/E is 240/16 = 15, above the peer 12, which confirms it.
Did you get it right without looking?
One question tells you little. A timed set on Equity and Bond Valuation and Evaluation of Performance shows your real accuracy, how long you take and where you lose marks.
More Equity and Bond Valuation and Evaluation of Performance questions
- A company's share trades at a price of Rs 150 and has earnings per share of Rs 10. Its industry average price-earnings ratio is 12. Using th…
- Meenakshi Textiles Ltd paid a dividend of Rs 5 per share last year. Dividends are expected to grow at a constant 6% per annum indefinitely. …
- Sagar Foods Ltd has an expected EPS of Rs 12 next year and a retention ratio of 40%. Its return on equity is 15% on all new investments and …
- Bharat Auto Ltd has a current dividend of Rs 4 per share, expected to grow at a constant 5% a year forever. Shareholders require a return of…
- Ananya Textiles Ltd. is expected to pay a dividend of Rs 6 per share next year. Dividends are expected to grow at 5% per annum forever. If t…
- A zero-coupon bond issued by an Indian infrastructure company has a face value of ₹1,000 and matures in 4 years. If investors require a yiel…