# PEG ratio

Consider the statement: “Unlike many valuation metrics that incorporate dividend discounting, the PEG ratio may be used to value firms with zero expected dividend growth prospects.” Is this statement correct? A) Yes, because the expected dividend growth rate is cancelled out in the computation of the PEG ratio. B) No, because the PEG ratio is undefined for zero-growth companies. C) Yes, because the computation of the PEG ratio does not use the rate of expected dividend growth.

C, its earnings growth not dividend, is this right?

B?

C

Is there a typo in choice C? It should be: No, because the computation of the PEG ratio does not use the rate of expected dividend growth.?

B

B

I don’t fully understand this question. it assumes that if we have no expected growth in divs, that we are paying out all divs to s/h’s. 1. couldn’t we have less than 100% divs paid to s/h’s AND have an expectation that they are not growing? 2. g in the peg ratio doesn’t use the growth rate in divs, g=ROE*b; so if less than 100% divs are paid out (ie a non 0 retention ratio) the peg ratio is defined. the equation has nothing to do with subsequent retention or payout ratios, it’s just the ratio at that given point in time - so it not related to “expected growth” in divs. Now, if the question posited that there was no expected growth opportunities, I could say that this is correct. however, I don’t think that an expectation of no growth in divs neccessarily means that a co. has no growth opportunities.

PEG ratio = P/E divided by annual EPS growth. There is no dividend growth over here at all. I select C

Oh, I misunderstood. I thought the answer had already been posted as B. Since the answer has not been posted - I choose C.

I think both B & C are true statements. If a company has 0 growth, its PEG ratio will be undefined. However, I agree idreesz. PEG is P/E divided by EPS growth rate (not dividends). A company that has positive EPS growth rate but pays no dividends (and thus will not have a dividend growth rate) will have a defined PEG.

Answer is B Because EPS (earnings) growth and dividends growth are MOSTLY assumed to be more or less the same even when we are calculating the Present Value from the Gordon Growth Model (Remember?)

Man, C actually sounds right. If you don’t fully read each word, then you would think B (like I did originally). What’s the right answer?