Question

5. Problem 8-11 eBook Problem 8-11 Assume a company has a payout ratio of 41 percent, a profit margin of 6 percent, a cost of equity of 10 percent and a growth rate of 2.5 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

Hello,

We will use Gordon growth model to determine price.

Let assume, sales per share is $1,000,000. Using Net Profit margin and dividend payout ratio, we will arrive at Dividends per share. Please refer to below:

Sales	1,000,000
Net Profit Margin	6%
Net Profit	60,000
Dividend Pay-out Ratio	41%
Dividend	24,600

Using Gordon growth model, we know that

P(0) = D(1) / (Ke-g)

Or

P(0) = (D(0) * (1+g)) / (Ke-g)

It is given that g is 2.5% and Ke is 10%. Using these values we get P(0) of $336,200 for current multiple and $344,605.

Thus forward and trailing multiple are 0.3446x and 0.3362x respectively