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CA Final · Advanced Financial Management · Security Analysis

Sagar Auto Ltd has a P/E multiple of 18 against an industry average of 15. Its EPS is Rs 20, and the industry P/E is considered appropriate. What is the value per share on industry P/E, and what does the comparison imply?

Applying the industry P/E of 15 to EPS of Rs 20 gives a value of Rs 300. The stock trades at 18 times earnings, or Rs 360, which is above this value, so it appears overvalued relative to its peers.

  1. ARs 300; the stock appears overvalued relative to peers at Rs 360Correct
  2. BRs 360; the stock appears undervalued relative to peers
  3. CRs 300; the stock appears undervalued relative to peers
  4. DRs 270; the stock appears overvalued relative to peers

Explanation

Market price = 18 x 20 = Rs 360. Value on industry P/E = 15 x 20 = Rs 300. Price of Rs 360 exceeds Rs 300, so the stock looks overvalued relative to peers.

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