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Assume Stock ABC has a P/E ratio of 45
Assume Stock ABC has a P/E ratio of 45. Analysts forecast its growth over the next five years to be 45%. The industry average P/E ratio is 30 and the industry average growth over the next five years is forecasted to be 20%. Is ABC a good buy (compared to its industry peers) according to the PEG ratio?
A) No, because it is overvalued given that its price is 45 times earnings B) Yes, because its PEG ratio is above the industry PEG ratio
C) Yes, because its PEG ratio is below the industry PEG ratio
D) No, because its PEG ratio is below the industry PEG ratio
Expert Solution
Answer is: C) Yes, because its PEG ratio is below the industry PEG ratio.
PEG ratio = P/E ratio/forecast growth rate
PEG ratio of 1 indicates stock is fairly valued. PEG ratio of below 1 indicates stock is undervalued and above 1 indicates overvalued.
PEG ratio of ABC stock = 45/45 = 1
PEG ratio of industry = 30/20 = 1.5
ABC is a good buy (compared to its industry peers) according to the PEG ratio because its PEG ratio is below the industry PEG ratio.
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