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: $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!
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