Afirm has a stock price of $50 per share. the firm’s past 12 month earnings per share is $2.5 and the firm's future earning is $5 per share. the firm has an roe of 20% and a dividend payout ratio of 50%. given an industry average peg ratio of 1.6, is the firm’s stock more likely to be overpriced or underpriced? a. overpriced, because it has peg ratio of 2 b. overpriced, because it has peg ratio of 1 c. underpriced, because it has a peg ratio of 1 d. underpriced, because it has a peg ratio of 2

Given:

Firm with an average Price/Earning-Growth(PEG) ratio of 1.6, the stock price is Overpriced, because it has Price/Earning-Growth(PEG) ratio of 1.

where;

PEG =

Price/Earning ration =

Reason: It can be stated that a PEG ratio of less than 1 denotes that the stock is a good investment since it is below its “fair value.”

If a PEG ratio is greater than 1 this will further means that stock is relatively expensive,and overpriced.

Therefore, the correct option is (b) Overpriced, because it has Price/Earning-Growth(PEG) ratio of 1.