1. Find the ROEs, the P/E ratios, and the 5-year historical growth rates for 20 of the firms included in the Market Insight Web page at www.mhhe.com/

edumarketinsight. Select the firms by clicking on the Population tab, then use the data in the Financial Highlights section in the Compustat Reports area. Calculate the plowback ratio for each firm.

a. Compute the sustainable growth rate for each firm, g  b  ROE, where b is the firm’s plowback ratio.

b. Compare the growth rates computed in part

(a) with the P/E ratios of the firms.

(It would be useful to plot P/E against g in a scatter diagram. This is easy to do in Excel.) Is there a relationship between g and P/E?

c. What is the average PEG ratio for the firms in your sample? How much variation is there across firms?

d. Find the price-to-book, price-to-sales, and price-to-cash flow ratios for each firm in your sample. Plot a scatter diagram of P/E against these three ratios. What do you conclude?

e. Based on the 5-year historical growth rate of earnings per share for each firm, how is the actual rate of the firm’s earnings growth correlated with its sustainable growth rate that you computed in part (a)?

f. What factors might affect the future growth rate of earnings? Which of these might be foreseen by investors? Which would be unpredictable?