单选题

Given the following assumptions about a company's financial estimates, calculate the P/E ratio, and determine whether the stock is undervalued or overvalued.
Earnings retention rate at 40%
Required rate of return of 12.5%
Return on equity (ROE) of 11%, expected to remain constant
Estimated earnings per share (EPS) for next year of $2.75
Current market price of $23.70
Which of the following statements is most correct? The P/E ratio is（）。

A、 7.41 and the stock is overpriced.
B、 7.41 and the stock is underpriced.
C、 7.41 and the stock is properly priced.

【正确答案】 A

【答案解析】

P/E ratio=Dividend Payout/(k_e-g)
Dividend Payout=(1-retention rate)=1-0.40=0.60.
G=(retention rate)× ROE=0.40× 0.11=0.044, or 4.4%.
P/E=0.60/(0.125-0.044)=7.41.
P₀=P/E× EPS=7.41× $2.75=$20.378, or approximately $20.40.
Since the market value is greater than the estimated value, the stock is overpriced.