Problem
You are valuing the stock of Apex Autos, Inc (NYSE: AA). You gathered the following data:
• Current stock price: $40.00;
• TTM EPS and dividend per share: $2.00 and $1.00, respectively;
• P/E, P/B, and P/S: 10.0, 2.5, and 1.8, respectively;
• ROE and net profit margin: 20 percent and 18 percent, respectively;
• Treasury bond rate, equity risk premium, and AA's beta: 2.3 percent, 5.5 percent, and 1.4, respectively.
• The dividend and earnings growth rates are 6 percent.
A. Calculate the justified trailing P/E.
B. Calculate the justified forward P/E.
C. Calculate the justified trailing P/B.
D. Calculate the justified trailing P/S.
E. Assuming that the data you gathered and the constant growth model are appropriate, state whether AA, based on fundamentals, appears to be fairly valued, overvalued, or undervalued. Why?