Question

Assume a company has a payout ratio of 43 percent, a profit margin of 7 percent, a cost of equity of 15 percent and a growth rate of 3.5 percent. Do not round intermediate calculations. Round your answers to three decimal places.

Answer 1

a. 0.2617

b. 0.2709

Step-by-step explanation:

a. What is the forward price-sales multiple?

b. What is the trailing price-sales multiple?

a. Forward price-sales multiple = (Profit margin *Payout ratio) / (cost of equity - growth rate)

= (7% * 43%) / (0.15 - 0.035)

= 0.0301 / 0.115

= 0.2617391304347826

= 0.2617

b. Forward price-sales multiple = [ (1 + growth rate) x (Profit margin x Payout ratio) ] / (cost of equity - growth rate)

= (1.035) * (7% * 43%) / (0.15 - 0.035)

= 1.035*0.0301 / 0.115

= 0.0311535 / 0.115

= 0.2709