Justified P/E

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archived_user

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Justified P/E = 4.3
If actual P/E is 16, then the asset is overpriced. Completely understood!
But why it’s underpriced if the actual P/E is 7?? yet it’s above the justified ratio of 4.3, so it should be overpriced as well, shouldn’t?!!
 
Unfortunately, I don’t have their materials.
What’s their rationale?
 
Hi Baidar & S2000magician -
See below. This was poorly worded IMO.
“A firm has an expected dividend payout ratio of 30%, a required rate of return of 13%, and an expected dividend growth rate of 6%. Calculate the firm’s fundamental (justified) leading P/E ratio”…one will compute 4.5 (.3/(.13-.06)).
The text then says:
“The justified P/E ratio serves as a benchmark for the price at which the stock should trade. In the previous example, if the firm’s actual P/E ratio (based on the market price and expected earnings) was 16, the stock would be considered overvalued. If the firm’s market P/E ratio was 7, the stock would be considered undervalued”….
 
Sorry but didn’t get you! Yet the 7 market P/E > justified 4.5 thus it should be overvalued
 
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