Schweser Mock Book 2 exam 1 Q 35

CFA Level II
#1

They have given justified leading P/E ratio as 14.1 and asking if stock is undervalued/overvalued/FairValued.

They way i did i calculated leading P/E ratio from the data given as 1-b/r-g = .72/.085-.034 = 14.11 and i thought its fairly valued. In the schweser answer explanation they are calculating trailing PE from income statement with detailed calculation as 14.1 and leading calculating trailing P/E from given value of leading P/E as 14.1*(1+.034) = 14.6 and hence concluding Stock is undervalued.

I am not understanding what I am doing wrong in my calculation or why do we need to calculate P/E ratio from income statement when they have given 3 values to calculate it directly.

#2

The way I look at it is they tell you “leading” P/E. In the vingete you have the information needed to calculate “trailing” P/E. So inorder to compare apples to apples you need to multiple the given “leading” P/E by the growth rate to get the trailing P/E. Which is 14.6 for the market .

So when we do our own intrinsic calculation we are calculating trailing P/E because it’s the easiest info available to us. we get 14.1 trailing P/E. therefore we are lagging the market making us undervalued.