Relative Valuation II

1
Relative Valuation II
2
PE ratios across markets

• You are comparing the PE ratios for Latin
  American markets and notice that Venezuela has
  the lowest PE ratio. This would suggest that
  Venezuela is the cheapest Latin American market
• Yes
• No
• Explain.

3
PE ratios over time..

• The current PE ratio for the SP 500 is 14.89.
  This is much lower than the PE ratio has been
  during much of the last three decades. While this
  would suggest that stocks are under valued, which
  of the following could also explain this
  phenomenon?
• The risk free rate is at historic lows.
• The equity risk premium today is much higher than
  it has been historically.
• The return on equity at US companies has
  increased in the last couple of years.
• The expected earnings growth for US companies is
  likely to be higher, as companies bounce back
  from recession lows.
• None of the above

4
PE and Expected Growth

• You are comparing two companies. Company A has a
  PE ratio of 20 and expected growth of 10 a year
  for the next 5 years. Company B has a PE ratio of
  10 and an expected growth rate of 5 a year for
  the next 5 years. Which of the following
  conclusions can you draw?
• Company B is cheaper. It has a lower PE ratio.
• Company A is cheaper, it has higher expected
  growth
• They are priced similarly, since they both trade
  at a PEG ratio of 2 (PE/Expected growth)
• Impossible to tell
• Explain.