###
**CFA Practice Question**

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:

Correct Answer: 1.39

P/S ratio = profit margin x payout ratio x growth factor / (required rate of return - growth rate) = 0.20 x 0.45 x 1.08 / (0.15 - 0.08) = 1.39.

###
**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! |