Appropriate price-sales multiple for longs drug

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Longs Drug, a large U.S. drugstore chain operating primarily in northern California, had sales per share of $122 on which it reported earnings per share of $2.45 and paid a dividend per share of $1.12. The company is expected to grow 6 percent in the long run, and has a beta of 0.90. The current Treasury bond rate is 7 percent.

a. Estimate the appropriate price/sales multiple for Longs Drug.

b. The stock is currently trading for $34 per share. Assuming the growth rate is estimated correctly, what would the profit margin need to be to justify this price per share?

Reference no: EM13963247

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