Problem:

You are analyzing a stock for inclusion in your portfolio. You are valuing it based the worth of its peers and you believe P/S and net profit margin are the best indicators for valuation. Your firm has the same risk, payout ratio, and growth profile as a peer group of companies; however, you expect it to have a net profit margin of 8% and the peers have a net profit margin of 12%.

Required:

Question: If the peers have a P/S ratio of 3.00, what is the fair value P/S ratio for the stock you are considering?

a) 0.67

b) 1.00

c) 2.00

d) 3.00

e) 5.00

Note: Please show the work not just the answer.