LOS k: Calculate the P/E-to-growth ratio (PEG), and explain its use in relative valuation.

Q1. Good Sports, Inc., (GSI) has a leading price-to-earnings (P/E) ratio of 12.75 and a 5-year consensus growth rate forecast of 8.5%. What is the firm’s P/E to growth (PEG) ratio?

A)   150.00.

B)   0.67.

C)   1.50.

Q2. The relative valuation model known as the PEG ratio is equal to:

A)   earnings per share growth rate / price-to-earnings.

B)   price-to-earnings (P/E) / earnings per share (EPS) growth rate.

C)   P/E × earnings.

Q3. Which of the following statements regarding the P/E to growth (PEG) valuation approach is least accurate? The P/E to growth (PEG) valuation approach assumes that:

A)   there are no risk differences among stocks.

B)   there is a linear relationship between price to earnings (P/E) and growth.

C)   stocks with higher PEGs are more attractive than stocks with lower PEGs.

Q4. The definition of a PEG ratio is price to earnings (P/E):

A)   divided by the average growth rate of the peer group.

B)   divided by average historical earnings growth rate.

C)   divided by the expected earnings growth rate.

LOS k: Calculate the P/E-to-growth ratio (PEG), and explain its use in relative valuation. fficeffice" />

Q1. Good Sports, Inc., (GSI) has a leading price-to-earnings (P/E) ratio of 12.75 and a 5-year consensus growth rate forecast of 8.5%. What is the firm’s P/E to growth (PEG) ratio?

A)   150.00.

B)   0.67.

C)   1.50.

Correct answer is C)

The firm’s PEG is 12.75 / 8.50 = 1.50.

Q2. The relative valuation model known as the PEG ratio is equal to:

A)   earnings per share growth rate / price-to-earnings.

B)   price-to-earnings (P/E) / earnings per share (EPS) growth rate.

C)   P/E × earnings.

Correct answer is B)

The PEG ratio is equal to the price-to-earnings ratio divided by the EPS growth rate

Q3. Which of the following statements regarding the P/E to growth (PEG) valuation approach is least accurate? The P/E to growth (PEG) valuation approach assumes that:

A)   there are no risk differences among stocks.

B)   there is a linear relationship between price to earnings (P/E) and growth.

C)   stocks with higher PEGs are more attractive than stocks with lower PEGs.

Correct answer is C)

The PEG valuation approach implicitly assumes there is a linear relationship between price to earnings (P/E) and growth, even though there is not a "real world" linear relationship. The analyst must be cautious when using the PEG ratio for valuation or comparison purposes especially if the growth rate is very small or very large. If earnings or the growth rate is negative the PEG ratio is meaningless. The PEG ratio does not adjust for varying levels of risk among stocks and views stocks with lower PEG ratios to be more attractive than stocks with higher PEG ratios.

Q4. The definition of a PEG ratio is price to earnings (P/E):

A)   divided by the average growth rate of the peer group.

B)   divided by average historical earnings growth rate.

C)   divided by the expected earnings growth rate.

Correct answer is C)

The PEG ratio is P/E divided by the expected earnings growth rate.

[此贴子已经被作者于2009-5-2 19:45:14编辑过]

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