土豆妮

For which of the following firms is the Price/Earnings to Growth (PEG) ratio most appropriate for identifying undervalued or overvalued equities?

Firm A: Expected dividend growth = 6%; Cost of equity = 12%; price-to-earnings (P/E) = 12.
Firm B: Expected dividend growth = ?6%; Cost of equity = 12%; price-to-earnings (P/E) = 12.
Firm C: Expected dividend growth = 1%; Cost of equity = 12%; price-to-earnings (P/E) = 12.

A) Firm C.

B) Firm A.

C) Firm B.

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The formula for the PEG ratio is: PEG = (P/E) / g. It measures the tradeoff between P/E and expected dividend growth (g). For traditional growth firms, PEG ratios fall between 1 and 2. The general rule is that PEG ratios above 2 are indicative of overvalued firms (expensive), and PEG ratios below 1 are indicative of firms that are undervalued (cheap).

Firm A:	PEG = 2, indicating a stock that is appropriately priced.
Firm B:	The PEG ratio of firms with negative expected dividend growth is negative, which is meaningless. For Firm B, PEG = -2.
Firm C:	Firms with very low expected dividend growth are likely to have PEG ratios that unrealistically indicate overvalued stocks. For Firm C, PEG = 12.

土豆妮

The warranted or intrinsic price multiple is called the:

A) multiple implied by the market price.

B) justified price multiple.

C) multiple implied by historical growth.

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A justified price multiple is the warranted or intrinsic price multiple. It is the estimated fair value of that multiple.

土豆妮

A justified price multiple is the:

A) warranted or intrinsic price multiple.

B) multiple implied by historical growth.

C) multiple implied by the market price.

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A justified price multiple is the warranted or intrinsic price multiple. It is the estimated fair value of that multiple.