A firm has a share 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?

Question

Quizplus · Accepted Answer

The PEG ratio is calculated as P/E ratio divided by the earnings growth rate.

First, we need to calculate the P/E ratio:

EPS = Earnings / Shares Outstanding 
EPS = $75M / 20M 
EPS = $3.75

P/E ratio = Price per share / EPS 
P/E ratio = $54.75 / $3.75 
P/E ratio = 14.6

Next, we need to calculate the earnings growth rate:

ROE = Net Income / Equity 
15% = $75M / Equity 
Equity = $500M

Plowback ratio = 65% 
Retention ratio = 1 - Plowback ratio 
Retention ratio = 1 - 0.65 
Retention ratio = 0.35

Earnings growth rate = ROE x Retention ratio 
Earnings growth rate = 15% x 0.35 
Earnings growth rate = 5.25%

Finally, we can calculate the PEG ratio:

PEG ratio = P/E ratio / Earnings growth rate 
PEG ratio = 14.6 / 5.25% 
PEG ratio = 1.50

Therefore, the answer is A) 1.50.

A Firm Has a Share Price of $54