Question

Problem 8-11 Assume a company has a payout ratio of 43 percent, a profit margin of 7 percent, a cost of equity of 14 percent and a growth rate of 3.0 percent. Do not round intermediate calculations. Round your answers to three decimal places. a. What is the forward price-sales multiple? b. What is the trailing price-sales multiple?

Answer 1

1.
Forward Price to Sales=P0/S1=D1/S1*1/(r-g)=S1*profit margin*payout/(r-g)*1/S1=profit margin*payout/(r-g)=7%*43%/(14%-3%)=0.273636364

2.
Trailing Price to Sales=P0/S1=D1/S0*1/(r-g)=S1*profit margin*payout/(r-g)*1/S0=(1+growth rate)*profit margin*payout/(r-g)=1.03*7%*43%/(14%-3%)=0.281845455