The following were the P/E ratios of firms in the aerospace/defense industry at the end of December,

201x, with additional data on expected growth and risk:

Company P/E Ratio Expected

Growth

Beta

Boeing 17.3 3.5% 1.10

General Dynamics 15.5 11.5% 1.25

General Motors - Hughes 16.5 13.0% 0.85

Grumman 11.4 10.5% 0.80

Lockheed Corporation 10.2 9.5% 0.85

Logicon 12.4 14.0% 0.85

Loral Corporation 13.3 16.5% 0.75

Martin Marietta 11.0 8.0% 0.85

McDonnell Douglas 62.6 13.0% 1.15

Northrop 9.5 9.0% 1.05

Raytheon 12.1 9.5% 0.75

Rockwell 13.9 11.5% 1.00

Thiokol 8.7 5.5% 0.95

United Industrial 10.4 4.5% 0.70

1. Estimate the average P/E ratios for this industry. Do you include all comparable firms in calculating the average? Why or why not?

2. An analyst concludes that Thiokol is relatively undervalued, because its P/E ratio is lower than the industry average. Would you agree with him/her? Explain.