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

Kaveri Auto's share has a current market price of Rs 200 and EPS of Rs 16. Its industry average P/E is 15. According to the relative valuation approach using the industry P/E, what is the intrinsic value per share and the decision?

Intrinsic value is Rs 240, found by multiplying EPS of Rs 16 by the industry P/E of 15. Since the market price of Rs 200 is below this value, the share is undervalued and the indicated action is to buy.

  1. ARs 240; the share is undervalued, so buyCorrect
  2. BRs 200; the share is fairly valued, so hold
  3. CRs 240; the share is overvalued, so sell
  4. DRs 186.67; the share is overvalued, so sell

Explanation

Intrinsic value = EPS × industry P/E = 16 × 15 = Rs 240. As market price Rs 200 is below Rs 240, the share is undervalued and a buy. Rs 186.67 comes from dividing 200 by 15 wrongly interpreted, and a sell signal would reverse the comparison.

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