Reading 44: U.S. Portfolio Strategy: Seeking Value—Anato

following, security, comment, because, valuation

LOS c: Illustrate why the PEG valuation technique must be used with care.

Q1. At a regional security analysts conference, Sandeep Singh made the following comment: "A PEG ratio is a very useful valuation metric because it generates meaningful results for all equities, regardless of the rate of dividend growth." Is Singh correct?

A) No, because the PEG ratio generates highly questionable results for low-growth companies.

B) Yes, because the expected dividend growth rate is cancelled out in the computation of the PEG ratio.

C) Yes, because the computation of the PEG ratio does include the rate of expected dividend growth.

Q2. Two security analysts, Ramon Long and Sri Beujeau, disagree about certain aspects of the PEG ratio. Long argues that: "unlike typical valuation metrics that incorporate dividend discounting, the PEG ratio is unique because it generates meaningful results for firms with negative dividend discount growth prospects." Is Long correct?

A) Yes, because the expected dividend growth rate is cancelled out in the computation of the PEG ratio.

B) Yes, because the computation of the PEG ratio does not use the rate of expected dividend growth.

C) No, because the PEG ratio generates meaningless results for low-growth companies.

Q3. Consider the statement: "Unlike many valuation metrics that incorporate dividend discounting, the PEG ratio may be used to value firms with zero expected dividend growth prospects." Is this statement correct?

A) Yes, because the expected dividend growth rate is cancelled out in the computation of the PEG ratio.

B) No, because the PEG ratio is undefined for zero-growth companies.

C) Yes, because the computation of the PEG ratio does not use the rate of expected dividend growth.