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I agree with you about the PEG being wrong. However, your PE ratio gives all too high an answer. A more suitable formula is this.

PE= (Free cash Flow/Earnings)*(1+growth rate)
-----------------------------------------
30 year bond rate- growth rate + .05


The reason is this. Everyone must agree that the true value of any economic asset is the amount of cash that can be taken out of an asset over its lifetime, discounted to present value. The formula you give does not take ino account the amount of cash that needs to be put back in, in order to maintain growth. The above formula only works for a firm with a steady growth rate. This growth rate must be <7%, as a company growing steadily to eternity cannot grow at a rate any faster than the economy as a whole.

For a firm in the rapid growth stage it is much more productive to simply discount future cash flows. Your ratio is superior to PEG as it takes into accont mor variables. the two problems lie in the fact that not all income is available in cash(if it needs to be used to add equipment it isn't really profit), and second it is preposterous to think that the risk premium for equities is only 2%. Read Greenspan's speech on 9/5, he comments on the fact that the risk premium has gotten too low. The historical return of stocks over bonds since 1926 has been about 5.5%. This is a much more reasonable risk premium. The fact that you add growth at the end makes the formula economically not viable. Why does that number go there, why can you take a growth rate, which is a percentage, and turn it into a whole number. If you are trying to explain today's multiples, the extreme leniency of your formula is another clue to the overvaluation existing in the market today,

Horace
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