Regressing theP/Eratio ofeachfirm againsttheexpected
growthrate yieldsthefollowingresults(with t-statisticsin
brackets below each coefficient).
FirmswithhighergrowthhavesignificantlyhigherP/Eratios
thanfirms with lower expectedgrowth. Infact, every 1%
differenceinexpectedgrowthratesincreasestheP/Eratioby
1.77.Usingthisregression,wecanestimatethepredictedP/E
ratioforAdobeSystems,whichhasanexpectedgrowthrate
of 19.50%:
At its actual P/E ratio of 38.03, Adobe is very slightly
undervalued (by approximately 1.93%):
Inthefollowingtable,weestimatethepredictedP/Eratios
and the percent under- or overvaluation for each of the
companies in the sample.