Following details are available for PQR Ltd.: Current Dividend = 3.50 Cost of Equity = 12.50% Growth Rate = 2% You required to - (i) Calculate Price…
CA Final · Advanced Financial Management · PYQS · May 2025
Following details are available for PQR Ltd.: Current Dividend = 3.50 Cost of Equity = 12.50% Growth Rate = 2% You required to - (i) Calculate Price of Share of PQR Ltd. (ii) Is PQR Ltd.'s Share over-valued if the Share Price = 45, ROE = 8% and EPS = 2.75? Show your calculations using both the P/E Multiple Approach and Earnings Growth Model.
Suggested Answer and Working Notes:
(a) (i) Present Value of the stock of PQR Ltd. is:- V 0 = 3.50(1.02)/0.125-0.02 = 34.00 (ii) (A) Value of stock under the PE Multiple Approach Particulars (₹) Actual Stock Price 45.00 Return on equity 8% EPS 2.75 PE Multiple (1/Return on Equity) = 1/8% 12.50 Market Price per Share 34.38 Since, Actual Stock Price is higher, hence it is overvalued. (B) Value of the Stock under the Earnings Growth Model Particulars Actual Stock Price 45.00 Return on equity 8% EPS 2.75 Growth Rate 2% Market Price per Share [EPS ×(1+g)]/(K e - g) 46.75 = 2.75 × 1.02/0.06 Since, Actual Stock Price is lower, hence it is undervalued.
Topics: Security Valuation
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