Shaar (from the previous problem) has revised slightly her estimated earnings growth rate for Rio National and, using normalized (underlying trend) EPS, which is adjusted for temporary impacts on earnings, now wants to compare the current value of Rio National’s equity to that of the industry, on a growth-adjusted basis. Selected information about Rio National and the industry is given in Table 13.10.

Rio National Estimated earnings growth rate 11.00%

Current share price $25.00 Normalized (underlying trend) EPS for 2009 $ 1.71 Weighted-average shares outstanding during 2009 16,000,000 Industry Estimated earnings growth rate 12.00%

Median price/earnings (P/E) ratio 19.90 TA B L E 1 3 . 1 0 Rio National Corp. vs.

industry Compared to the industry, is Rio National’s equity overvalued or undervalued on a P/Eto-

growth (PEG) basis, using normalized (underlying) earnings per share. Assume that the risk of Rio National is similar to the risk of the industry.

 LO.1