Problem 1. Company A trades for $50 in the market and has EPS of $2.

The Average P/E Ratio of comparable companies is 20x. Analyze if the

Company A is under/over valued based on P/E ratio and estimate the
relative price of Company A.

Problem 2. Consider the following data of Lukuluku Firm:

YEAR PE Firm PE Industry

2017 24.5 20.1
2018 26.8 22.2
2019 29.3 19.8
2020 32.6 21.3
Average ? ?

Forecast EPS=3.2

Current PE of the Industry=22

Requirement: Compute the Relative Value of the firm and analyze if

the firm is under/(overvalued) relative to the Industry Average.

Problem 3. On March 11, 1994, the New York Stock Exchange Composite
was trading at 16.9 times earnings, and the average dividend yield
across stocks on the exchange was 2.5%. The treasury bond rate on
March 11, 1994, was 6.95%. The economy was expected to grow 2.5% a
year, in real terms, in the long term, and the consensus estimate for
inflation, in the long term, was 3.5%.

Requirements: Compute the:

1) Dividend Payout ratio

2) Expected Growth rate
3) Cost of equity
4) P/E Ratio

Problem 4. The following were the P/E ratios of firms in the

aerospace/defense industry at the end of December, 1993, with
additional data on expected growth and risk:

Company P/E Ratio Expected Beta Payout

Growth
Boeing 17.3 3.5% 1.10 28%
General Dynamics 15.5 11.5% 1.25 40%
General Motors - Hughes 16.5 13.0% 0.85 41%
Grumman 11.4 10.5% 0.80 37%
Lockheed Corporation 10.2 9.5% 0.85 37%
Logicon 12.4 14.0% 0.85 11%
Loral Corporation 13.3 16.5% 0.75 23%
Martin Marietta 11.0 8.0% 0.85 22%
McDonnell Douglas 22.6 13.0% 1.15 37%
Northrop 9.5 9.0% 1.05 47%
Raytheon 12.1 9.5% 0.75 28%
Rockwell 13.9 11.5% 1.00 38%
Thiokol 8.7 5.5% 0.95 15%
United Industrial 10.4 4.5% 0.70 50%

Requirement: Using a regression, control for differences across firms

on risk, growth, and payout. And determine the over or undervaluation.

Regression Result: