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CA Final · Advanced Financial Management · Security Valuation

Kaveri Foods Ltd expects EPS of ₹20 and earnings growth of 15% a year. Comparable listed firms trade at an average PEG ratio of 1.2 (P/E divided by growth rate expressed in whole percent). Using the PEG approach, what is the indicated share price of Kaveri Foods?

The indicated price is ₹360. With a peer PEG of 1.2 and growth of 15 percent, the justified P/E is 18, and multiplying by EPS of ₹20 gives ₹360. Growth must be used as a whole-number percent, consistent with how PEG is defined.

  1. A₹250
  2. B₹360Correct
  3. C₹24
  4. D₹3.60

Explanation

Fair P/E = PEG × growth (in percent) = 1.2 × 15 = 18. Price = 18 × ₹20 = ₹360. ₹250 arises from dividing growth by PEG (15/1.2 = 12.5) instead of multiplying, and ₹3.60 arises from using growth as 0.15 instead of 15.

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