CFA Practice Question

CFA Practice Question

Assume the following information about a publicly traded pharmaceutical firm:

Revenue: $16,000,000
Cash flow: $1,700,000
Net worth per share: $14.55
Number of common shares outstanding: 1,000,000
Required return: 21% per year
Expected growth rate: 19% per year
Next dividend: $1.05 per share

Using this information, what are the price-to-sales, price-to-book, and price-to-cash flow ratios, respectively?
A. The answer cannot be completely calculated from the information provided.
B. 0.106, 38.4, 0.0324
C. 0.106, 52.5, 30.88
Explanation: To calculate the price-to-sales, price-to-book, and price-to-cash flow ratios, it is necessary to know the price of the common stock in question at t0, which is not provided in this example.

User Contributed Comments 9

User Comment
shasha can't we use DDM to get the P0? P0 = D1/(Ke-g) = $52.5 am i wrong on concepts? no answer is right if we take price of $52.5!
MrValve It looks like there is enough information provided. I got C
shasha 3 figures from C, i got only 30.88 correct, can't get .106 and 52.5 for p/s and p/bv respectively. anybody?
tony1973 No you cannot use the (expected) price calculated from DDM, and the price derived is expected price. When you calculate P/E you should use real price instead. The point of DDM is that you can compare expected price and the current real price and evaluate if the stock is under- or over- valued.
KD101 Tony is probably correct 0 Kike Shasha I got only 30.88 but P/B is not likely to be 52.5 so that is not correct (as if price is 52.5 than book value has to be $1 to get P/B of 52.5)
Franz I think tony is right. To calculate ratios you must use prevailing market prices.
Will1868 Shasha - I found the same answer as you - if we believe that the market is efficient and that the assumptions in this problem are correct, then the DDM should equal the current price of the stock.
PYP1977 correct answer is A. the above ratios are used with actual trading price which is not provided in question.
prajacti very good point tony. we really have to read each problem carefully and not blindly plug values into the formula to get the answer.
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