土豆妮

The following data was available for Morris, Inc., for the year ending December 31, 2001:

• Sales per share = $150.
• Earnings per share = $1.75.
• Return on Equity (ROE) = 16%.
• Required rate of return = 12%.

If the expected growth rate in dividends and earning is 4%, what will the appropriate price-to-sales (P/S) multiple be for Morris?

A) 0.037.

B) 0.114.

C) 0.109.

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Profit Margin = EPS / Sales per share = 1.75 / 150 = 0.01167 or 1.167%.

Payout ratio = 1 ? (g / ROE) = 1 ? (0.04 / 0.16) = 0.75 or 75%.

P₀ / S₀ = [profit margin × payout ratio × (1 + g)] / (r ? g) = [0.01167 × 0.75 × 1.04] / (0.12 ? 0.04) = 0.11375.

土豆妮

An analyst has gathered the following data about the Garber Company:

• Payout Ratio = 60%.
• Expected Return on Equity = 16.75%.
• Required rate of return = 12.5%.

What will be the appropriate price-to-book value (PBV) ratio for the Garber Company based on return differential?

A) 0.58.

B) 1.73.

C) 1.38.

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The estimated growth rate is 6.7% [0.1675 × (1 ? 0.60)] and PBV ratio based on rate differential will be:
P₀ / BV₀ = (ROE₁ ? g) / (r ? g) = (0.1675 ? 0.067) / (0.125 ? 0.067) = 1.73.