Answer: undervalued

## Explanation We need to calculate the predicted P/E using the cross-sectional regression model and compare it to the actual P/E of 12. Given: - Beta = 1.2 - Dividend payout ratio = 0.30 - Earnings growth rate = 0.10 Using the regression equation: \[ \text{Predicted P/E} = 12 + (5.75 \times \text{dividend payout}) + (14.35 \times \text{earnings growth rate}) - (0.60 \times \text{beta}) \] Substitute the values: \[ \text{Predicted P/E} = 12 + (5.75 \times 0.30) + (14.35 \times 0.10) - (0.60 \times 1.2) \] \[ \text{Predicted P/E} = 12 + 1.725 + 1.435 - 0.72 \] \[ \text{Predicted P/E} = 12 + 3.16 - 0.72 \] \[ \text{Predicted P/E} = 14.44 \] Now compare: - Predicted P/E = 14.44 - Actual P/E = 12 Since the actual P/E (12) is lower than the predicted P/E (14.44), the stock appears undervalued. This means that based on the company's characteristics (dividend payout, earnings growth, and beta), the regression model suggests it should have a higher P/E ratio than what the market is currently pricing.

Author: LeetQuiz Editorial Team