The following were the P/E ratios of firms in the aerospace/defense industry with additional data on expected growth and risk:
a. Estimate the average and median P/E ratios. What, if anything, would these averages tell you?
b. An analyst concludes that Thiokol is undervalued because its P/E ratio is lower than the industry average. Under what conditions is this statement true?
Would you agree with it here?
c. Using the PEG ratio, assess whether Thiokol is undervalued. What are you assuming about the relationship between value and growth when you use PEG ratios?
d. Using a regression, control for differences across firms on risk, growth, and payout. Specify how you would use this regression to spot under and overvalued stocks. What are the limitations of this approach?