Question

a firm has a stock price of $54.75 per share. the firm's earnings are $75 million, and the firm has 20 million shares outstanding. the firm has an roe of 15% and a plowback of 65%. what is the firm's peg ratio? multiple choice 1.00 1.50 1.15 1.25

Answer 1

To calculate the PEG ratio of the firm, divide the P/E ratio by the earnings growth rate, resulting in a PEG ratio of 1.50.

The correct option is 2.

Step-by-step explanation:

The firm's PEG ratio is calculated using its price-to-earnings (P/E) ratio and its earnings growth rate. The P/E ratio is the stock price divided by earnings per share (EPS), while the growth rate is derived from the Return on Equity (ROE) and the plowback ratio (retention rate). First, we calculate the EPS which is the total earnings divided by the number of shares outstanding: $75 million / 20 million shares = $3.75 per share.

Then, P/E ratio equals the stock price divided by EPS: $54.75 / $3.75 = 14.6. The firm's earnings growth rate (g) can be estimated by the product of ROE and the plowback ratio: 15% x 65% = 9.75%. Finally, the PEG ratio is the P/E ratio divided by the growth rate: 14.6 / 9.75 = 1.50.

The correct option is 2.