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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

Sundaram Textiles Ltd has 10,00,000 equity shares. Its net profit after tax is ₹50,00,000 and its market price per share is ₹400. Profit maximisation would rank projects by profit, whereas wealth maximisation uses market value. If a new project is expected to raise the EPS by 10% and the market price-earnings ratio stays constant, what will be the expected market price per share?

The expected market price is ₹440. Current EPS is ₹5 and the P/E ratio is 80. A 10% rise in EPS gives ₹5.50, and multiplying by the constant P/E of 80 yields ₹440, which equals a 10% rise on ₹400.

  1. A₹420
  2. B₹440Correct
  3. C₹550
  4. D₹405

Explanation

Current EPS = 50,00,000/10,00,000 = ₹5; P/E = 400/5 = 80. New EPS = 5 × 1.10 = ₹5.50. New price = 5.50 × 80 = ₹440. Check: a constant P/E means the price rises by the same 10%, 400 × 1.10 = 440. ₹420 wrongly adds only 5%, and ₹550 confuses EPS with price.

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