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CMA Final · Strategic Financial Management · Fundamental Analysis and Technical Analysis

A stock of Himalaya Foods has a current P/E of 18 on EPS of Rs 25. The industry average P/E is 15. An analyst expects EPS to rise 20% next year and the stock to trade at the industry P/E then. What is the expected percentage return from price appreciation alone over the year?

The expected price appreciation is 0 percent. The current price is 18 times Rs 25, or Rs 450. Next year's EPS of Rs 30 at the industry multiple of 15 gives Rs 450 again, so the P/E contraction exactly offsets the earnings growth.

  1. A-16.7%Correct
  2. B0%
  3. C11.1%
  4. D-10.0%

Explanation

Current price = 18×25 = Rs 450. Next EPS = 30; target price = 15×30 = Rs 450. Return = 0%. So the key is 0%; the -16.7% option comes from applying 15 to unchanged EPS 25 (375/450-1).

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