Very briefly, describe the company. What are their central and ongoing operations (the ones that result in revenue)? Be sure to provide their name and ticker symbol. The company is Amazon (AMZN). Calculate the difference between the constant growth rate g and discount rate r that gives you Yahoo's value of P/E (TTM)? This is easy: If P/E = 1 / (r - g), then r - g = 1 / P/E. The PE ratio (TTM) in Yahoo Finance is 66.
2. Describe the range of r you think is reasonable. Most analysts use discount rates between 8% and 15% for common stock. Choose higher values if the firm is in a risky industry and/or has a lot of debt.
3. Use your estimate of r to estimate short-term growth g and a persistence factor p in the modified Gordon Growth Model. In this model, earnings grow at a rate g in Year 1, g * p in Year 2, g * p^2 in Year 3, etc., so you can get the same number with a high g and low p that you get with a low g and high p. What values make sense and why?
4. If the P/E ratio is simply not seeming reasonable, offer a suggestion as to why. For example, investors may be betting on some big event that will create major growth or major loss (e.g., a change in regulation, a lawsuit, a patent approval, an acquisition). They may also be paying a lot of attention to the net book value.