This module is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 3 of 9 · 14 min
Justified multiples: forecasted fundamentals, PEG and regression
A justified multiple is the multiple a stock 'should' have; you can take it from peers or derive it from fundamentals such as ROE, growth and the cost of equity, and you can combine both ideas by adjusting multiples for growth (PEG) or regressing them on their drivers.
In short
- A justified multiple is an estimate of the fair multiple, compared with the actual one. Comparables: the peer mean or median. Forecasted fundamentals: derived from a present value model.
- Justified P/B from the constant growth model: . P/B exceeds 1 only if ROE exceeds the cost of equity.
- Adjustment approach: modify a multiple for one driver, e.g. the PEG ratio = P/E ÷ expected EPS growth (in %). A higher PEG suggests a more expensive stock.
- Regression approach: regress peer multiples on several drivers; actual below predicted suggests undervalued, actual above predicted suggests overvalued.
- Both approaches assume linear relationships, which may not hold.
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