Question: If the justified leading P/E for BMC stock is 14.1X, then the BMC stock is best described as: I decided to compare the 14.1 by computing the justified leading P/E by using (1-b)/(r-g) however the solution compared the leading P/E to the trailing P/E to determine if it was overvalued/undervalued/fairly valued. It is given in the question that BMC is currently trading at $26.5 and has 1,000 million shares outstanding.

@diya - To compare whether it's fairly valued or not, this needs to be compared with the actual multiple. The solution compares justified trailing P/E (by multiplying justified leading P/E with (1+g)) to get 14.6x (the g was not given in image above). Then it uses that to compare with current actual P/E.

The way i see this is when a P/E is given (probably obtained from a mean average of the specific industry) you have to remove the E (your specific firm's EPS) to get the P (price). So you'll know whether the specific company you are researching on is over or undervalued in relative to the industry's mean P/E as larger firms might have higher NI compared to smaller firms but EPS could be lower due to higher amount of outstanding share.

A CFA Level 2 Discussion About Justified Trailing And Leading P/E

Add A Reply

This topic has 4 replies, 3 voices, and was last updated Apr-178:05 pm by Sophie Macon.

Author

Posts
- Sophie Macon
  Keymaster
  16 Apr 2017 at 3:04 pm
  Up
  2
  ::
  @diya – To compare whether it’s fairly valued or not, this needs to be compared with the actual multiple.
  
  The solution compares justified trailing P/E (by multiplying justified leading P/E with (1+g)) to get 14.6x (the g was not given in image above). Then it uses that to compare with current actual P/E.
- vincentt
  Participant
  - CFA Level 3
  16 Apr 2017 at 4:28 pm
  Up
  1
  ::
  The way i see this is when a P/E is given (probably obtained from a mean average of the specific industry) you have to remove the E (your specific firm’s EPS) to get the P (price).
  
  So you’ll know whether the specific company you are researching on is over or undervalued in relative to the industry’s mean P/E as larger firms might have higher NI compared to smaller firms but EPS could be lower due to higher amount of outstanding share.
- Sarah
  Participant
  16 Apr 2017 at 8:04 pm
  Up
  1
  ::
  Thanks guys! I figured that it didn’t make sense to compare the justified leading P/E by calculating the justified P/E. Would I be correct to assume that all fundamental ratios should be compared to market ratio’s to determine if they are over/under/fairly valued?
- Sophie Macon
  Keymaster
  16 Apr 2017 at 8:05 pm
  Up
  1
  ::
  Yup @diya, that should be the case.
Author

Posts

Viewing 3 reply threads

You must be logged in to reply to this topic.