CA Final · Advanced Financial Management · Security Analysis
Nisha Auto Ltd has an expected EPS of Rs 15 and a payout ratio of 50%. Required return is 13% and constant growth is 8%. What is the justified forward P/E ratio?
The justified forward P/E is 10. It equals the payout ratio of 50% divided by the gap between required return and growth, which is 13% minus 8%, giving 0.50 divided by 0.05.
- A10.00
- B6.67Correct
- C8.33
- D7.50
Explanation
Justified forward P/E = payout/(ke - g) = 0.50/(0.13 - 0.08) = 0.50/0.05 = 10. So the correct value is 10.00. The 6.67 comes from dividing by 0.075 and is wrong; 7.50 uses the EPS times payout and not the ratio.
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