Question

You are a fund manager looking for undervalued stocks in the publishing industry. You narrow your focus down to two stocks: Pendant Publishing and Rando House. Pendant is currently trading at a P/E of 4x. Pendant’s earnings are expected to grow at a constant rate of 2% per year forever, and it is expected to maintain a payout ratio of 50%. Its cost of equity is 15%. Rando is currently trading at a P/E of 8x. It expects earnings to grow at 5% per year forever, and it is expected to maintain a payout ratio of 25%. Its cost of equity is 8%. Based on the true PE ratios of the companies and the currently traded ratios, what would your investment decision be? Choose from the following options. Group of answer choices DO NOT BUY either of the stocks BUY only Pendant BUY both the stocks BUY only Rando SELL both stocks

          You are a fund manager looking for undervalued stocks in the publishing industry. You narrow your focus down to two stocks: Pendant Publishing and Rando House.
Pendant is currently trading at a P/E of 4x. Pendant’s earnings are expected to grow at a constant rate of 2% per year forever, and it is expected to maintain a payout ratio of 50%. Its cost of equity is 15%.
Rando is currently trading at a P/E of 8x. It expects earnings to grow at 5% per year forever, and it is expected to maintain a payout ratio of 25%. Its cost of equity is 8%.
Based on the true PE ratios of the companies and the currently traded ratios, what would your investment decision be? Choose from the following options.
Group of answer choices
DO NOT BUY either of the stocks
BUY only Pendant
BUY both the stocks
BUY only Rando
SELL both stocks

Added by Carla V.

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