NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles
A stock trades at a P/E of 20 and its EPS growth rate is expected to be 16% a year. What is its PEG ratio?
The PEG ratio is 1.25. It is calculated by dividing the P/E multiple of 20 by the expected earnings growth rate of 16 (in percent), which adjusts the P/E for growth and helps compare stocks with different growth outlooks.
- A0.80
- B1.25Correct
- C3.20
- D36.00
Explanation
PEG = P/E divided by growth rate in percent = 20 / 16 = 1.25. Using 16/20 gives 0.80, which inverts the ratio. Multiplying gives 320, and adding gives 36, neither of which is the definition.
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