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**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.

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**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. |