Given the following assumptions about a company’s financial estimates, calculate the P/E ratio, and determine whether the stock is undervalued or overvalued. Earnings retention rate at 40% Required rate of return of 12.5% Return on equity (ROE) of 11% , expected to remain constant Estimated earnings per share (EPS) for next year of $ 2.75 Current market price of $ 23.70 Which of the following statements is most correct The P/E ratio is:()
A. 7.41 and the stock is overpriced.
B. 7.41 and the stock is underpriced.
C. 7.41 and the stock is properly priced.
参考答案：A
解析：
P/E ratio=Dividend Payout/(ke-g)
Dividend Payout=(1-retention rate)=1-0.40=0.60
G=(retention rate)×ROE =0.40×0.11=0.044, or4.4%
P/E=0.60/(0.125-0.044)=7.41
P0=P/E×EPS=7.41×$2.75=$20.378, or approximately $20.40.
Since the market value is greater than the estimated value, the stock is overpriced.