1. Jeremiah Claxton, CFA, is a junior portfolio manager for a large university

endowment fund. Claxtons supervisor, Joanne LeMonte, has asked him to

compare the valuation of Home Decor, Inc. and Lesters Companies, Inc. and

make a recommendation for an addition to the funds retail portfolio.

LeMonte has specifically asked Claxton to consider the price-to-cash flow

valuation metric when making his recommendation. Claxton has gathered

the following information.

Claxton has also determined that the CAPM betas of the two firms are not significantly different at the 1% level. Based on the information in the table, Are those two companies overvalued or undervalued?