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    Based on the analysis you did on CPI's valuation and in the context of the valuation of the major consumer products companies (look at the price-to-earnings ratio of CPI versus the competitors), do you believe analysts think your firm is undervalued? Could that perception change if the economic climate changes? Do you believe CPI's valuation is being impacted today because the firm is only a regional player? What is the basis for your conclusion?
    Undervalued means that the stock is selling for a lower price than it should be based on the firm's financial ratios including the P/E ratio. A low P/E/ ratio indicates a low price compared to earnings so a financially healthy firm with a low P/E ratio may be undervalued. What else might a low P/E mean? What are some reasons a firm may be undervalued?
    If CPI had 1,000,000 shares outstanding, earnings of $15M, and a stock price of $18 a share; what would its P/E ratio be? How would CPI's EPS and P/E ratio compare to competitor's EPS and P/E ratio and would you consider CPI stock to be undervalued? Why or why not?

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    Solution Preview

    The response addresses the queries posted in 1081 words with references.

    //Before talking about the valuation of the firm and the P/E ratio, we will first describe what is the P/E ratio. The P/E ratio expresses the relation between the market price and the earnings per share of the firm. We start with discussing about the valuation of the firm and its competitors.//

    The analysts think that the firm is undervalued because the P/E ratio of the company is lower than the other firms in the similar industry. The price earning ratio indicates that the firm is undervalued. The P/E ratio of its competitors is higher. Since it is working on a smaller scale, the investors do not expect much and the market price of the firm is also lower. So, the P/E ratio will be lower. On the other hand, the P/E ratio of the big companies is relatively higher. Therefore, the companies like P&G, Colgate, and Unilever have a greater P/E ratio. The other competitors of the company including the medium sized corporations also have a bigger P/E ratio than CPI. I believe that the valuation of CPI is being affected because the firm is only a regional player. This is because the other firms dealing in the same products are global or operate on a relatively bigger scale. They have higher profits and also give greater dividends to their shareholders.

    Yes, this perception would change if the economic climate changes. During the times of low inflation, the P/E ratio tends to be higher and vice versa. When the economy is in a good condition and the inflation is not very high, the P/E ratio is higher. Thus, this ratio also changes ...

    Solution Summary

    The response addresses the queries posted in 958 words with references.