土豆妮

What is the appropriate price-to-sales (P/S) multiple of a stock that has a retention ratio of 45%, a return on equity (ROE) of 14%, an earnings per share (EPS) of $5.25, sales per share of $245.54, an expected growth rate in dividends and earnings of 6.5%, and shareholders require a return of 11% on their investment?

A) 0.158.

B) 0.278.

C) 0.227.

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Recall that profit margin is measured as E₀ / S₀. In this example, the profit margin is (5.25 / 245.54) = 0.0214. Thus:

P₀ / S₀ = [(E₀ / S₀)(1 ? b)(1 + g)] / (r ? g) = [0.0214(0.55)(1.065)] / (0.11 ? 0.065) = 0.278

土豆妮

A firm’s return on equity (ROE) is 14%, its required rate of return is 10%, and its expected growth rate is 8%. What is the firm’s justified price-to-book value (P/B) based on these fundamentals?

A) 2.00.

B) 3.00.

C) 2.75.

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The firm’s justified price-to-book value = (ROE – g) / (r – g) = (0.14 – 0.08) / (0.10 – 0.08) = 3.00

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