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zubka84 [21]
3 years ago
15

A firm has a stock price of $50 per share. The firm’s past 12 month earnings per share is $2.5 and the firm's future earning is

$5 per share. The firm has an ROE of 20% and a dividend payout ratio of 50%. Given an industry average PEG ratio of 1.6, is the firm’s stock more likely to be overpriced or underpriced? A. Overpriced, because it has PEG ratio of 2 B. Overpriced, because it has PEG ratio of 1 C. Underpriced, because it has a PEG ratio of 1 D. Underpriced, because it has a PEG ratio of 2
Business
1 answer:
Yuliya22 [10]3 years ago
7 0

Answer:

Given:

Firm with an average Price/Earning-Growth(PEG) ratio of 1.6, <em><u>the stock price is Overpriced, because it has Price/Earning-Growth(PEG) ratio of 1. </u></em>

<em><u>where;</u></em>

PEG = \frac{Price/Earning}{Earning\:Grtowth\:Rate}

Price/Earning ration = \frac{Share Price}{Earning per share}

<em><u> </u></em>

<u><em>Reason:</em></u> It can be stated that a PEG ratio of less than 1 denotes that<u><em> the stock is a good investment since it is below its “fair value.” </em></u>

If a PEG ratio is greater than 1 this will further means that stock is <u><em>relatively expensive,and overpriced.</em></u>

<u><em></em></u>

<u><em>Therefore, the correct option is (b) Overpriced, because it has Price/Earning-Growth(PEG) ratio of 1. </em></u>

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Attachment is attached below.

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