Sincethesefirmsdifferonbothriskandexpectedgrowth,a
regression of P/E ratios on both variables is presented.
Thenumbersinbracketsaret-statisticsandsuggestthatthe
relationships between P/E ratiosand both variables in the
regression are statistically significant. The R-squared
indicatesthepercentageofthedifferencesinP/Eratiosthatis
explained by the independent variables. Finally, the
regression
6 itself can be used to get predicted P/E ratios for the
companies in the list. Thus, the predicted P/E ratio for
Coca-Cola,basedonitsstandarddeviationof35.51%andthe
expected growth rate of 19%, would be:
SincetheactualP/EratioforCoca-Colais44.33,thiswould
suggestthatthestockisovervalued,givenhowtherestofthe
sector is priced.