1. A firm has a stock price of $50 per share. The firm’s past 12 month earnings

Question

1. 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 1

B. Overpriced, because it has PEG ratio of 2

C. Underpriced, because it has a PEG ratio of 1

D. Underpriced, because it has a PEG ratio of 2

2. Rutland Corp's stock price is $30.25 and its earnings per share for the past year were $2.45. The forecasted earnings per share for the future 12 month are $2.32. What is its trailing (not forward) P/E ratio?

A. 13.04

B. 12.70

C. 12.35

D. 11.65

E. 12.00

Explanation / Answer

1.Given an industry average PEG ratio of 1.6, the stock price is Overpriced, because it has PEG ratio of 1.

Reason: As the thumb rule says that a PEG ratio of less than 1 suggests a good investment as the stock is  below its “fair value.” Again a PEG ratio greater than 1 means the stock is relatively expensive,and overpriced.

2.Trialing P/E Ratio: Current Share Price/Trialing 12 Months Earning Per Share

= $30.25/2.32

= $13.04

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