Answer: undervalued

## Explanation To determine if Company A is undervalued, fairly valued, or overvalued, we need to calculate its justified P/E ratio using the Gordon growth model and compare it to the peer P/E of 8.0. The Gordon growth model formula for P/E is: \[ P/E = \frac{1 - b}{r - g} \] Where: - \( b \) = Retention rate = 30% = 0.30 - \( r \) = Required rate of return = 10% = 0.10 - \( g \) = Growth rate = 5% = 0.05 First, calculate the dividend payout ratio: \[ 1 - b = 1 - 0.30 = 0.70 \] Now substitute into the formula: \[ P/E = \frac{0.70}{0.10 - 0.05} \] \[ P/E = \frac{0.70}{0.05} = 14.0 \] The justified P/E for Company A is 14.0, while the peer P/E is 8.0. Since Company A's justified P/E (14.0) is higher than the peer P/E (8.0), Company A appears undervalued relative to its peers. This makes sense because Company A has the same growth and risk profile as its peers, but a higher justified P/E suggests the market is not fully valuing its potential.

Author: LeetQuiz Editorial Team