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NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles

A stock has a book value per share of Rs 80 and a return on equity of 15%. The required return on equity is 12%. Using the price-to-book relationship P/B = ROE/ke (assuming zero-growth, all earnings paid out), what is the justified price?

The justified price is Rs 100. With zero growth, P/B equals ROE divided by required return, which is 15% over 12% or 1.25, and multiplying by the book value of Rs 80 gives Rs 100.

  1. ARs 64
  2. BRs 100Correct
  3. CRs 96
  4. DRs 120

Explanation

Justified P/B = 15/12 = 1.25. Price = 1.25 × 80 = Rs 100. Rs 64 inverts the ratio (12/15 × 80). Rs 96 is 80 × 1.2, a miscalculation.

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