Question

The actual stock price is $70, the return on equity is 18%, the PE ratio is 5.556, and EPS is $12.60. The stock is:

a. Overvalued
b. Undervalued
c. Fairly valued
d. Insufficient data

Answer 1

The stock may be undervalued.

Step-by-step explanation:

The given information includes the actual stock price of $70, a return on equity of 18%, a PE ratio of 5.556, and EPS (earnings per share) of $12.60. To evaluate whether the stock is overvalued, undervalued, fairly valued, or if there is insufficient data, we need to consider the PE ratio.

The PE ratio is calculated by dividing the stock price by the EPS. In this case, the PE ratio is approximately 5.556. A low PE ratio indicates that the stock may be undervalued, while a high PE ratio suggests that the stock may be overvalued. Since a PE ratio of $5.556 is relatively low, it suggests that the stock may be undervalued. Therefore, the correct answer is b. Undervalued.