You are valuing a food company with a beta of 0.9, a dividend payout ratio of 0.45, and an earnings growth rate of 0.08. The estimated regression for a group of other stocks in the same industry is

where DPR is the dividend payout ratio and EGR is the five-year earnings growth rate.

i. Based on this cross-sectional regression, what is the predicted P/E for the food company?
ii. If the stock’s actual trailing P/E is 18, is the stock fairly valued, overvalued, or undervalued?

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Predicted P/E = 12.12 + (2.25 DPR) - (0.20 Beta) + (14.43 EGR)