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CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance

A share trades at Rs 240 with expected EPS of Rs 16. A comparable industry average P/E ratio is 12. Using the industry P/E on the expected EPS, the share is:

Applying the industry P/E of 12 to expected EPS of Rs 16 gives a value of Rs 192. Since the market price of Rs 240 exceeds this, the share is overvalued relative to the industry multiple.

  1. AOvervalued, since intrinsic value is Rs 192 against price of Rs 240Correct
  2. BUndervalued, since intrinsic value is Rs 192 against price of Rs 240
  3. CFairly valued at Rs 240
  4. DOvervalued, since intrinsic value is Rs 288 against price of Rs 240

Explanation

Intrinsic value = 12 x 16 = Rs 192. Market price Rs 240 is higher than Rs 192, so the share is overvalued. The share's own P/E is 15, above the industry 12.

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