You are tasked with valuing Variant Technology using the PEG ratio. A variant is trading at $24 per share and reported earnings per share of $ 2.00 over the last four quarters. Analyst consensus is that these earnings will grow 10% a year over the next 5 years. The rest of the sector trades an average PE ratio of 15 and sector earnings are expected to grow 12% a year over the next 5 years.

a. Based purely on a comparison of PEG ratios, how under- or over-valued is Variant?

b. Now assume that you are told that Variant will be in stable growth after year 5, growing 3% a year forever. A variant is expected to have a return on equity of 12% and a cost of equity of 9% (for the next 5 years and beyond). Based upon these fundamentals, estimate the intrinsic PEG ratio for Variant.

Answer rating: 100% (QA)

a By comparing PEG ratios to the sector Variant is considered und... View the full answer