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CA Final · Advanced Financial Management · Business Valuation

Ganga Engineering Ltd has a book value of equity of Rs 600 crore, PAT of Rs 90 crore and 10 crore shares. A peer has a P/BV of 2.4 and ROE of 12%. Ganga's ROE is 15%. Assuming P/BV is proportional to ROE, what is the justified value per share for Ganga?

The justified value is Rs 180 per share. Book value per share is Rs 60, and scaling the peer P/BV of 2.4 by the ROE ratio 15/12 gives 3.0, so 3.0 times Rs 60 equals Rs 180.

  1. ARs 144
  2. BRs 150
  3. CRs 180Correct
  4. DRs 225

Explanation

Ganga's P/BV adjusted = 2.4 x (15/12) = 3.0. Book value per share = 600/10 = Rs 60. Value = 3.0 x 60 = Rs 180. Rs 144 uses the unadjusted P/BV of 2.4. Rs 225 mistakenly applies 3.75. Rs 150 uses a multiple of 2.5.

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