Giantin Growing, AG (GG) is currently selling for €38.50, with TTM EPS and dividends per share of €1.36 and €0.91, respectively. The company’s P/E is 28.3, P/B is 7.1, and P/S is 2.9. The ROE is 27%, and the profit margin on sales is 10.24%. The Treasury bond rate is 4.9%, the equity risk premium is 5.5%, and GG’s beta is 1.2.
a. What is GG’s required rate of return, based on the capital asset pricing model (CAPM)?
b. Assume that the dividend and earnings growth rates are 9%. What trailing P/E, P/B, and P/S multiples would be justified in light of the required rate of return in part a and current values of the dividend payout ratio, ROE, and profit margin?
c. Given that assumptions and constant growth model are appropriate, state and justify whether GG, based on fundamentals, appears to be fairly valued, overvalued, or undervalued.