1. Relative Valuation II

2. PE ratios across markets
You are comparing the PE ratios for Latin American markets and notice that Venezuela has the lowest PE ratio. This would suggest that Venezuela is the cheapest Latin American market
Yes No
Explain.

3. PE ratios over time..
The current PE ratio for the S&P 500 is This is much lower than the PE ratio has been during much of the last three decades. While this would suggest that stocks are under valued, which of the following could also explain this phenomenon?
The risk free rate is at historic lows.
The equity risk premium today is much higher than it has been historically.
The return on equity at US companies has increased in the last couple of years.
The expected earnings growth for US companies is likely to be higher, as companies bounce back from recession lows.
None of the above

4. PE and Expected Growth
You are comparing two companies. Company A has a PE ratio of 20 and expected growth of 10% a year for the next 5 years. Company B has a PE ratio of 10 and an expected growth rate of 5% a year for the next 5 years. Which of the following conclusions can you draw?
Company B is cheaper. It has a lower PE ratio.
Company A is cheaper, it has higher expected growth
They are priced similarly, since they both trade at a PEG ratio of 2 (PE/Expected growth)
Impossible to tell
Explain.