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Article

Benchmarking the PEG Ratio

Jacques A Schnabel
The Journal of Wealth Management Winter 2009, 12 (3) 89-94; DOI: https://doi.org/10.3905/jwm.2009.12.3.089
Jacques A Schnabel
is a professor of business at School of Business and Economics, Wilfrid Laurier University in Waterloo, Ontario, Canada.
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  • For correspondence: jschnabel@wlu.ca
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Abstract

This article argues that, to properly employ the PEG ratio criterion for the determination of under/overvalued shares, the traditional benchmark of 1 is not appropriate and the benchmark employed must be customized to the share, i.e., it must reflect that share’s specific EPS growth rate and cost of equity. Invoking the constant growth model of share valuation, a formula for the suitable benchmark is developed. Graphs which illustrate the functional dependence of the benchmark on its determinants are presented, and the errors induced due to the use of the incorrect customary benchmark of unity are investigated.

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The Journal of Wealth Management: 12 (3)
The Journal of Wealth Management
Vol. 12, Issue 3
Winter 2009
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Benchmarking the PEG Ratio
Jacques A Schnabel
The Journal of Wealth Management Oct 2009, 12 (3) 89-94; DOI: 10.3905/jwm.2009.12.3.089

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Benchmarking the PEG Ratio
Jacques A Schnabel
The Journal of Wealth Management Oct 2009, 12 (3) 89-94; DOI: 10.3905/jwm.2009.12.3.089
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  • Article
    • Abstract
    • PEG RATIO BENCHMARKS
    • THE COST OF EQUITY EFFECT
    • THE EPS GROWTH RATE EFFECT
    • EMPIRICAL EVIDENCE
    • CONCLUSIONS
    • REFERENCES
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