CFA CFA Level 2 Justified Trailing and Leading P/E

# Justified Trailing and Leading P/E

• Author
Posts
• 2

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.

• 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
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.

• 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?

• 1

Yup @diya, that should be the case.