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Basic Question 2 of 4

An analyst has gathered the following information about a firm:

  • Projected sales per share: $40.
  • Profit margin: 20%.
  • Earnings retention rate: 55%.
  • Required rate of return: 15%.
  • Earnings growth rate: 8%

The justified P/S ratio for the company is:
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User Contributed Comments 1

User Comment
alejandroc Easy way to remember:
If you multiply Sales* Prof. margin=Earnings.
If you multiply BV* ROE= Earnings.

So if you want P/S or P/E, you should multiply by PM or ROE!
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Your review questions and global ranking system were so helpful.
Lina

Lina

Learning Outcome Statements

calculate and interpret alternative price multiples and dividend yield;

calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS;

explain and justify the use of earnings yield (E/P);

describe fundamental factors that influence alternative price multiples and dividend yield;

calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals;

calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology;

evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables;

calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation;

calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model;

explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition;

calculate and interpret EV multiples and evaluate the use of EV/EBITDA;

CFA® 2025 Level II Curriculum, Volume 4, Module 23.