Question

TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $1,500,000 and there are 135,000 shares outstanding.

a. If the benchmark price-sales ratio for the company is 5.5, how much will you pay for the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b. If the benchmark price-sales ratio for the company is 4.9, how much will you pay for the stock?

Answer 1

(a) $61.11

(b) $54.44

Step-by-step explanation:

1)

Value of Stock = Benchmark price-sales ratio × Stock's sales

= 5.5 × 1,500,000

= $8,250,000

Thus,

Price of stock = Value of Stock ÷ shares outstanding

= 8,250,000 ÷ 135,000

= $61.11

Thus, I would pay $61.11 for the stock.

2)

Value of Stock = Benchmark price-sales ratio × Stock's sales

= 4.9 × 1,500,000

= $7,350,000

Thus,

Price of stock = Value of Stock ÷ shares outstanding

= $7,350,000 ÷ 135,000

= $54.44

Thus, I would pay $54.44 for the stock.