Company X trades at a PE multiple of 24.0x and is expected to grow its earnings at 30.0% per annum. Company Y trades at a PE multiple of 15.0x and is expected to grow its earnings at 10.0% per annum. What are their PEG Ratios, and which company is attractively valued under Peter Lynch's valuation rule?

[ A ]Company X has PEG of 1.50x; Company Y has PEG of 0.80x; Company Y is attractively undervalued.

[ B ]Both companies have identical PEG ratios of 2.0x and are severely overvalued.

[ C ]Company X has PEG of 0.80x (24 / 30); Company Y has PEG of 1.50x (15 / 10); Company X is attractively undervalued because its PEG is below 1.0.[ CORRECT ]

[ D ]Company X has PEG of 7.20x; Company Y has PEG of 1.50x; Company X is a value trap.

Takeaway

Option C is correct: Company X has PEG of 0.80x (24 / 30); Company Y has PEG of 1.50x (15 / 10); Company X is attractively undervalued because its PEG is below 1.0.

Derivation

The PEG Ratio (Price-Earnings-to-Growth), popularized by legendary investor Peter Lynch, adjusts the PE ratio for the expected annual earnings growth rate: PEG Ratio = PE Ratio / Expected EPS Growth Rate (as a whole percentage number). Calculations: Company X PEG = 24.0 / 30 = 0.80x. Company Y PEG = 15.0 / 10 = 1.50x. Under Peter Lynch's rule of thumb: A PEG ratio < 1.0 indicates that high growth justifies the PE multiple (undervalued/attractive), while a PEG > 1.0 suggests overvaluation. Company X is more attractively priced when growth is factored in. This tests PEG analysis. The common trap is looking at PE alone without growth.

Why the others fail

A — Company X has PEG of 1.50x; Company Y has PEG of 0.80x; Company Y is attractively undervalued.

This option inverts the PEG calculations; Company X has a PEG of 0.80x while Company Y has a PEG of 1.50x.

B — Both companies have identical PEG ratios of 2.0x and are severely overvalued.

PEG ratios differ significantly (0.80x vs 1.50x) due to the large difference in projected earnings growth rates.

D — Company X has PEG of 7.20x; Company Y has PEG of 1.50x; Company X is a value trap.

7.20x results from multiplying PE by growth (24 * 0.30) rather than dividing PE by the growth percentage rate.