CFA Practice Question
Assume the following information about a publicly traded pharmaceutical firm:
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
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. |