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CA Final · Advanced Financial Management · Security Valuation

Godavari Finance Ltd has book value per share of ₹150, sustainable ROE of 18%, cost of equity of 12% and a perpetual growth rate of 6%. Using the justified price-to-book ratio, (ROE − g)/(ke − g), what is the fair value per share?

Fair value is ₹300 per share. The justified price-to-book ratio is (18 percent minus 6 percent) divided by (12 percent minus 6 percent), which equals 2, and applying it to book value of ₹150 gives ₹300. The firm earns more than its cost of equity, so it deserves a premium to book.

  1. A₹225
  2. B₹300Correct
  3. C₹75
  4. D₹450

Explanation

Justified P/B = (0.18 − 0.06)/(0.12 − 0.06) = 0.12/0.06 = 2. Value = 2 × ₹150 = ₹300. ₹225 uses ROE/ke = 1.5, ignoring growth, and ₹75 inverts the ratio to 0.5.

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