You are analyzing three large-cap US stock issues with approximately equal earnings growth prospects and risk. As one step in your analysis, you have decided to check valuations relative to the S&P 500 Composite Index. Exhibit 7 provides the data.

Based only on the data in Exhibit 7, address the following:

i. Explain which stock appears relatively undervalued when compared with the S&P 500.

ii. State the assumption underlying the use of five-year average P/E comparisons.

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EXHIBIT 7 Comparison with an Index Multiple (Prices and EPS in US Dollars; as of 31 March 2013) Measure Current price P/E Five-year average P/E (as percent of S&P 500 P/E) Stock A Stock B Stock C S&P 500 23 50 80 1569.19 12.5 25.5 12.5 17.9 80 120 105