1. The following were the P/E ratios of firms in the aerospace/defense industry at the end of December, 1993, with additional data on expected growth and risk: Company PIE Ratio Expected Growth Beta Payout Boeing 173 3.5% 1.10 28% General Dynamics 15.5 11.5% 1.25 40% General Motors-Hughes 16.5 13.0% 0.85 41% Grumman 114 10.5% 0.80 37% Lockheed Corporation 10.2 9.5% 0.85 37% Logicon 12.4 14.0% 0.85 11% Loral Corporation 13.3 16.5% 0.75 23% Martin Marietta 11.0 8.0% 0.85 22% McDonnell Douglas 22.6 13.0% 1.15 37% Northrop 9.5 9.0% 1.05 47% Raytheon 12.1 9.5% 0.75 28% Rockwell 13.9 11.5% 1.00 38% Thiokol 8.7 5.5% 0.95 15% United Industrial 104 4.5% 0.70 50% A. Estimate the average and median P/E ratios. What, if anything, would these averages tell you? B. An analyst concludes that Thiokol is undervalued, because its P/E ratio is lower than the industry average. Under what conditions is this statement true? Would you agree with it here? 2. National City Corporation, a bank holding company, reported earnings per share of $3 in 1993, and paid dividends per share of $1.6. The earnings had grown 7.5% a year over the prior five years, and were expected to grow 6% a year in the long term (starting in 1994). The stock had a beta of 1.2 and traded for 10 times earnings. The treasury bond rate was 7%. Assume the equity premium rate is 5.5% A. Estimate the implied P/E Ratio for National City Corporation. B. What long term growth rate is implied in the firm's current P/E ratio?