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You forecast that the company is going to reduce costs in the future, thus improve profit margin from 10% to 15%, the sales and debt of the company are not going to change, so the asset turnover and equity multiplier ratio is going to remain at 0.5 and 1.5. There’s no interest expense and tax, so tax and interest burden ratios are at 1. Historically the company has a dividend payout ratio of 40%. Earnings per share today is $5, price today is $50. The industry PE ratio is 6 with 3% growth rate, is the company overvalued or undervalued?

You forecast that the company is going to reduce costs in the future, thus improve profit margin from 10% to 15%, the sales and debt of the company are not going to change, so the asset turnover and equity multiplier ratio is going to remain at 0.5 and 1.5. There’s no interest expense and tax, so tax and interest burden ratios are at 1. Historically the company has a dividend payout ratio of 40%. Earnings per share today is $5, price today is $50. The industry PE ratio is 6 with 3% growth rate, is the company overvalued or undervalued?

Financial Management: Theory & Practice
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter7: Corporate Valuation And Stock Valuation
Section: Chapter Questions
Problem 1P: Ogier Incorporated currently has $800 million in sales, which are projected to grow by 10% in Year 1...
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You forecast that the company is going to reduce costs in the future, thus improve profit margin from 10% to 15%, the sales and debt of the company are not going to change, so the asset turnover and equity multiplier ratio is going to remain at 0.5 and 1.5. There’s no interest expense and tax, so tax and interest burden ratios are at 1. Historically the company has a dividend payout ratio of 40%. Earnings per share today is $5, price today is $50. The industry PE ratio is 6 with 3% growth rate, is the company overvalued or undervalued?

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