Reference no: EM133114048

Question - Tambrands, a leading producer of tampons, reported a net income of $122 million on revenues of $684 million in 1992. Earnings growth was anticipated to be 11%over the next five years, after which it was expected to be 6%. The firm paid out45% of its earnings as dividends in 1992, and this payout ratio was expected to increase to 60% during the stable period. The beta of the stock was 1.00. During the course of 1993, erosion of brand loyalty and increasing competition for generic brands led to a drop in net income to $100 million on revenues of $700 million. The sales/book value ratio was comparable to 1992 levels. (The treasury bond rate in 1992 and 1993 was 7%, and the risk premium was 5.5%.)

Required -

a. Estimate the price-sales ratio, based on 1992 profit margins and expected growth.

b. Estimate the price-sales ratio, based on 1993 profit margins and expected growth. (Assume that the extraordinary growth period remains five years, but that the growth rate will be impacted by the lower margins.)