Question #137
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: 48
Status: Unattempted
Correct Answer: A
Question
Consider the statement: "Unlike many valuation metrics that incorporate dividend discounting, the PEG ratio may be used to value firms with zero expected dividend growth prospects." Is this statement correct?
Answer Choices:
A. No, because the PEG ratio is undefined for zero-growth companies
Explanation
The PEG ratio measures the tradeoff between P/E and expected earnings growth (g). The
formula for the PEG ratio is: PEG = (P/E) / g. Firms with zero expected earnings growth will
have an infinite (or undefined) PEG ratio due to division by zero.