Is a good business worth $60?
Separate a company’s quality from the return its current price offers.
“It’s not what you buy, it’s what you pay that counts.” (opens the source)
The question
Alder Signal is a fictional US-listed maker of industrial sensors. Its share price is $60 and it has 20 million diluted shares. All figures below are invented. Your one-year hurdle is a 15% expected price return. Ignore dividends, fees and taxes.
| Probability | Net income ($m) | P/E (x) | |
|---|---|---|---|
| Bear | 25% | 48 | 15 |
| Base | 50% | 66 | 20 |
| Bull | 25% | 80 | 24 |
EPS = net income ÷ 20m shares. Scenario value = EPS × P/E. The probabilities are assumptions, not measured frequencies.
| Value | |
|---|---|
| Current price ($) | 60 |
| Diluted shares (m) | 20 |
| One-year hurdle (%) | 15 |
The hurdle is an expected price return over the same one-year period.
Alder is a strong company with upside to $96. I recommend buying at $60.
“Would you buy at $60? Give your expected value, downside and entry price for the 15% hurdle.”
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A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Turn each scenario into a share value
What would you do here? Open the move you’d make.
Use the $96 bull target as the target price.
Tempting, but it misses something. The bull case is only one assumed outcome.
Calculate all three share values.
The strong move. Use earnings and valuation together; a bull target alone hides the distribution.
See how a strong candidate says it
“Bear EPS is $2.40, base is $3.30 and bull is $4.00. At the stated multiples, the values are $36, $66 and $96.”
Why it works: Use earnings and valuation together; a bull target alone hides the distribution.
Step 2: Weight the outcomes
What would you do here? Open the move you’d make.
Call the upside 60%, because $96 is 60% above $60.
Tempting, but it misses something. That is bull-case upside, not the weighted return.
Use $66 expected value and 10% expected return.
The strong move. The expected value is a probability-weighted average, not a promise.
See how a strong candidate says it
“0.25 × $36 + 0.50 × $66 + 0.25 × $96 = $66. At $60, that is a 10% expected return.”
Why it works: The expected value is a probability-weighted average, not a promise.
Step 3: Test the price against the mandate
What would you do here? Open the move you’d make.
Pay $60 because the base case is above it.
Tempting, but it misses something. A positive expected return still misses the stated hurdle.
Solve for an entry price of $57.39.
The strong move. The hurdle must use the same one-year horizon and payoff definition as the model.
See how a strong candidate says it
“A 15% hurdle needs an entry price no higher than $66 ÷ 1.15 = $57.39, using these unchanged assumptions.”
Why it works: The hurdle must use the same one-year horizon and payoff definition as the model.
Step 4: Give a view that can change
What would you do here? Open the move you’d make.
Wait until everyone agrees on the bull case.
Tempting, but it misses something. Consensus is not the decision rule; price and evidence are.
Pass at $60 and name what could change the view.
The strong move. A recommendation names both the decision and the evidence that could reverse it.
See how a strong candidate says it
“I would pass at $60 on this model. The bear case loses 40%. I would reconsider below $57.39, or after evidence changes earnings or probabilities.”
Why it works: A recommendation names both the decision and the evidence that could reverse it.
The answer, in short
- Decision
- Pass at $60 under the stated hurdle.
- Because
- The expected price is $66, a 10% return; the hurdle is 15%.
- What would change it
- A price at or below $57.39, or defensible new evidence that improves the outcome distribution.
Common traps
- Treating the best outcome as the expected outcome.
- Calling a scenario downside a guaranteed floor.
- Using a multiple without an earnings basis.
Check your answer
- Did I calculate $36, $66 and $96?
- Did I get $66 expected value and 10% return?
- Did I solve $57.39 rather than subtract 15% from $66?
- Did I say why I would pass and what could change that?
Last reviewed Nov 10, 2026