2. Analysts have forecasted Chevron Corporation's next year's net income and book value of equity. The...

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2. Analysts have forecasted Chevron Corporation's next year's net income and book value of equity. The next year's net income and book value of equity is $20,000 million and $200,000 million respectively. The company has expected retention ratio of 60%, has a required rate of return of 10% and a growth rate 5%. Suppose that the average P/E ratio of the industry is 1.10x. Required: (a) What is the justified P/B ratio of the company? (b) Determine the justified P/E ratio of the company. (c) Based on the solutions to (a) and (b), discuss whether the stock is overvalued or undervalued. (d) What would be your decision as an investor if the stock is currently undervalued? 2. Analysts have forecasted Chevron Corporation's next year's net income and book value of equity. The next year's net income and book value of equity is $20,000 million and $200,000 million respectively. The company has expected retention ratio of 60%, has a required rate of return of 10% and a growth rate 5%. Suppose that the average P/E ratio of the industry is 1.10x. Required: (a) What is the justified P/B ratio of the company? (b) Determine the justified P/E ratio of the company. (c) Based on the solutions to (a) and (b), discuss whether the stock is overvalued or undervalued. (d) What would be your decision as an investor if the stock is currently undervalued?

Answer rating: 100% (QA)

a To find the justified PB ratio we need to divide the next years price to book value of eq... View the full answer