[Anonymous]

Not sure why I’m having such a difficult time with P/E ratio when it is simply (P/E) x E. Anyway, this problem from Becker asks for the PEG ratio. But looking through the “incorrect” answers, it says letter C uses the P/E ratio rather than the PEG ratio. How is Becker coming up with 256 as the P/E ratio?

Iota Corp. is using the PEG ratio to forecast its stock price in the coming year. The company’s current price and EPS are $100 and $10, respectively. Growth is expected to be 2.5%. What is the projected stock price?

a. 100

b. 102

c. 256

d. 263

Choice “c” is incorrect. The proposed solution uses the P/E ratio rather than the PEG ratio.

WHY?

[Anonymous]

Any takers to solve this?

[luis]

Read:

Page 2

Created with Compare Ninja

[Anonymous]

I actually just did this problem.

Call of the question is what is the stock price (today)

Stock Price Today = P0 (the 0 is a subscipt)

P0=PEG X E1 X G

P0 = (P0 / E0 / G ) X E1 X G

So we know ….

E1 = the EPS in 1 yr so use this year's eps and multiply it by the growth rate

E1= E0 X (1+g)

=(10 X (1+.025)

=10.25

so…..

P0 = (P0 / E0 / G ) X E1 X G

= (100/ 10/ 2.5) X (10 X (1+.025) X 2.5

= 4 X 10.25 X 2.5

= 102.50

The only thing I cant explain is why 2.5 inside peg is not .025 or 2.5% it makes no sense to me but I've moved on because you prob wont be seeing this question anyways and its not hard to remember. Just think of G = 2.5 and g =2.5% or .025 and youll be fine.

The thing you have to remember is PEG is easy its P/E/G right?

But we are using PEG to get the P0 also know as the stock price TODAY!

[Anonymous]

@ Luis – Thanks for the posting the link for the corrected answer. I was working on it last night and had problem with it too.

Anyway, I have this whole thing puzzled by this PEG, P/E things. The way I think and calculate this kinda question is:

Current Price = $100, Expected Grow Rate = 2.5%, SO, the expected future price should be = $100 * (1+2.5%) = 102.5! No need to divide the E or G since you are going to multiple them back anyway!!!??? Someone please explain or correct me if I missed anything on my calculation. Thanks a bunch!

[CPA ISA]

@CPA-Convertible
Current price is $10

AUD - 79
BEC - 76
FAR - 79
REG - NINJA in Training

CPA SOON ISA

[Adam]

This is a finance question and it will not be on the exam..

however PE is price divided by earnings per share

PEG ratio is something entirely different that divides the PE ratio (way of valuing current price) by its projected growth rate..here which is 2.5%

This is for investing and you wont be asked about this on the CPA.

[Author]

Replies