Emily Terranova, retail analyst, is looking at Costco (COST) for possible inclusion into a clients portfolio. Terranova gathers the following information on COST:

• Stock price is currently $96.14
• The company tends to operate at a retention ratio of 40%
• Long-run average ROE is 13% and long-run profit margin is 2.7%
• Enterprise value is $38.23 billion, and debt outstanding is $1.37 billion
• Cash is $5.98 billion, and shares outstanding is 432.34 million
• Most recent earnings per share were $3.58, and sales per share were $218.71

Terranova next gathering the following set of multiples on COST and a set of comparable retail companies:

	P/E	P/B	P/S	EV/EBITDA
Costco	26.85	3.31	0.44	11.05
Target	14.71	2.64	0.60	7.88
Walmart	15.52	3.55	0.54	8.24
Big Lots	13.13	2.98	0.48	5.62
Dollar General	21.40	3.72	1.14	10.83
Mean	18.32	3.24	0.64	8.72
Median	15.52	3.31	0.54	8.24

Terranova considers any company trading above 10% of its justified multiple to be overvalued, and any company trading at a discount of 10% (or larger) of its justified multiple to be undervalued.

Terranova estimates a cost of equity of 12% and a perpetual growth rate of 8% for COST.

Based upon the justified leading P/E ratio, Terranova will mostly likely determine COST to be:

Group of answer choices

overvalued.

undervalued.

fairly-valued.