Toyota Motor Corporation (TYO: 7203; NYSE: TM) is one of the world’s largest vehicle manufacturers. The company’s most recent fiscal year ended on 31 March 2013. In early September 2013, you are valuing Toyota stock, which closed at ¥6,340 on the previous day. You have used a free cash flow to equity (FCFE) model to value the company stock and have obtained a value of ¥6,722 for the stock. For ease of communication, you want to express your valuation in terms of a forward P/E based on your forecasted fiscal year 2014 EPS of ¥600. Toyota’s fiscal year 2014 is from 1 April 2013 through 31 March 2014.

i. What is Toyota’s justified P/E based on forecasted fundamentals?

ii. Based on a comparison of the current price of ¥6,340 with your estimated intrinsic value of ¥6,722, the stock appears to be undervalued by approximately 6 percent. Use your answer to Part 1 to state this evaluation in terms of P/Es.