NISM Certifications · NISM-Series-XV: Research Analyst · Qualities of a Good Research Report
An analyst values a company using a target P/E of 20 on estimated EPS of Rs 45 for next year. The current market price is Rs 828. What is the upside to the target price, rounded to the nearest whole percent, that the report should state?
The target price is 20 times Rs 45, which is Rs 900. Against the current price of Rs 828, the upside is Rs 72 divided by Rs 828, about 8.7%, which rounds to 9%. The base for upside must be the current price.
- A9%Correct
- B8%
- C12%
- D20%
Explanation
Target price = 20 x 45 = Rs 900. Upside = (900 - 828)/828 = 72/828 = 8.7%, which rounds to 9%. Using 8% truncates; 12% would wrongly use the target as base... (72/900 would be 8%); 20% confuses the P/E multiple with the return.
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