# Justified P/E

Justified P/E = 4.3

If actual P/E is 16, then the asset is overpriced. Completely understood!
But why it’s underpriced if the actual P/E is 7?? yet it’s above the justified ratio of 4.3, so it should be overpriced as well, shouldn’t?!!

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It should be.

Where did you get this question?

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Kaplan V4. R.49 page 304, the paragraph below the blue box

Unfortunately, I don’t have their materials.

What’s their rationale?

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Don’t know! no further explanation provided

Hi Baidar & S2000magician -

See below.   This was poorly worded IMO.

“A firm has an expected dividend payout ratio of 30%, a required rate of return of 13%, and an expected dividend growth rate of 6%.  Calculate the firm’s fundamental (justified) leading P/E ratio”…one will compute 4.5 (.3/(.13-.06)).

The text then says:

“The justified P/E ratio serves as a benchmark for the price at which the stock should trade.  In the previous example, if the firm’s actual P/E ratio (based on the market price and expected earnings) was 16, the stock would be considered overvalued.  If the firm’s market P/E ratio was 7, the stock would be considered undervalued”….

Sorry but didn’t get you! Yet the 7 market P/E > justified 4.5 thus it should be overvalued