CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

An analyst has gathered the following information about a firm:

  • Projected sales per share: $30.
  • Profit margin: 18%.
  • Book value per share: $45.
  • Interest free rate: 3%.
  • Earnings retention rate: 40%.
  • Required rate of return: 12%.
  • Debt/Equity ratio: 2:3.

The justified P/S ratio for the company is:
A. 1.57
B. 1.54
C. cannot determine as the earnings growth rate g is not given.
Explanation: The earnings growth rate g = retention rate x profit margin x sales / book value = 0.4 x 0.18 x 30 / 45 = 4.8%.

P/S ratio = profit margin x payout ratio x growth factor / (required rate of return - growth rate) = 0.18 x 0.6 x 1.048 / (0.12 - 0.048) = 1.572.

User Contributed Comments 5

User Comment
americade i thought the justified P/S was 1+g/r-g
i don't get Profit Margin X Payout X Growth/r-g. what if there is no dividend?
americade also, can we then say that ROE has an alternative computation of Profit Margin X Sales p/s / BVPS?
juansaez Nice question
ThePessimist The "project sales" in this question refers to sales from *last* year (like the earnings in a trailing P/E ratio).
saaythong americade, P/CF=(1+g)/(r-g). This is talking about the growth in cash flow. Also, the growth in this equation is growth in earnings I believe.
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