Question #102
Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples
PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf
Page: 35
Status: Unattempted
Question
Two security analysts, Ramon Long and Sri Beujeau, disagree about certain aspects of the PEG ratio. Long argues that: "unlike typical valuation metrics that incorporate dividend discounting, the PEG ratio is unique because it generates meaningful results for firms with negative expected earnings-growth." Is Long correct?
Answer Choices:
A. Yes, because the expected earnings-growth rate is cancelled out in the computation of the PEG ratio
B. No, because the PEG ratio generates meaningless results for negative earnings- growth companies
C. Yes, because the computation of the PEG ratio does not use the rate of expected earnings growth
Explanation
The PEG ratio is: PEG = (P/E) / earnings growth. As such, firms with negative expected
earnings growth will have a negative PEG ratio, which is meaningless.