How the PE & PEG Ratios Are Tested on the Series 79 Exam

If you’re gearing up for the Series 79 exam, expect clean, number-driven questions that test whether you can compute—and correctly interpret—P/E and PEG. Here’s exactly how they show up and how to nail them fast.

Step 1 — Calculate the P/E Ratio

Let’s look at an example of SIA. SIA is trading at $50 per share with EPS of $4.20 and an expected growth rate of 14%.

Given this information our first step is to calculate the PE ratio and very simply the PE ratio is the stock price divided by the earnings per share and that’s provided.

So it’s 50 dollars per share divided by 4 dollars and 20 cents.  We see this company has a PE ratio of 11.9.

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Step 2 — Convert P/E to PEG

Then we take the PE ratio of 11.9 and divide it by the growth rate which is given to us of 14% and we see that the PEG ratio for SIA is indeed 0.85 and this would be indicative of a good value or the company being undervalued in the marketplace, again relative to its growth rate.

On the Series 79 exam, this exact flow—P/E first, then PEG from the given growth rate—is a common setup.

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Using P/Es and Relative PEG Ratios to Compare Two Companies

All right Let’s take a look at how we can use PEs and relative PEG ratios to evaluate the relative pricing of 2 different companies.

Here we have ABC and XYZ.  ABC has a PE ratio of 22 and XYZ has a PE ratio of 15.

If we just stop there and asked which company is more expensive, well most people would say “ABC is far more expensive than XYZ because its PE ratio is 22 and XYZ’s PE ratio is only 15.”
But when we take into consideration the growth rate of these companies we see a much different picture.

• The growth rate of ABC is 20% while the growth rate of XYZ is 10%.
  
• And if we were to calculate the relative PEG ratios well we see that the PEG ratio for ABC is 1.1 and what we did was we took that  PE ratio of 22 and divided it by the growth rate of 20% and that’s how we came up with that PEG ratio of 1.1.
  
• Similarly we calculate the PEG ratio for XYZ and XYZ has a PE ratio of 15 and a growth rate of 10 and the PEG ratio for XYZ is 1.5.
  

XYZ based on its growth rate is actually far more expensive than ABC.  Now they both may be relatively expensive because they have a PEG ratio of greater than one but certainly XYZ’s is more expensive than ABC.

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Quick Wrap-Up

• P/E = price ÷ EPS → 11.9 in the example.
  
• PEG = P/E ÷ growth → 0.85 for SIA → undervalued relative to growth.
  
• ABC vs. XYZ: 22/20% = 1.1 vs. 15/10% = 1.5 → XYZ more expensive once growth is considered.
  

Master this exact sequence and wording style and you’ll be ready when the Series 79 exam drops a P/E-to-PEG comparison on test day.