Stock Valuation and PS [LO2] TwitterMe, Inc., is a new company and currently has

Question

Stock Valuation and PS [LO2] TwitterMe, Inc., is a new company and currently has negative earnings. The company's sales are $2.7 million and there are 130,000 shares outstanding. If the benchmark price-sales ratio is 4.3, what is your estimate of an appropriate stock price? What if the price-sales ratio were 3.6? 13. 14. Stock Valuation [LO1] Bayou Okra Farms just paid a dividend of $2.65 on its stock. The growth rate in dividends is expected to be a constant 4.5 percent per year indefinitely. Investors require a return of 15 percent for the first three years, a return of 13 percent for the next three years, and a return of 11 percent thereafter. What is the current share price?

Explanation / Answer

13) Sales per share = 2,700,000 / 130,000 = 20.77

Stock Price = P/S x Sales per share = 4.3 x 20.77 = $89.31

If P/S = 3.6, then Stock Price = $74.77

14) P6= D6 x (1 + g) / (r–g) = D0 x (1 +g)^7 / (r – g) = $2.65 x (1.045)^ 7/ (11% – 4.5%) = $55.48

P3= D4 / (1 + r) + D5 / (1 + r)^2 + (D6 + P6) / (1 + r)^3

P3 = $2.65 x (1.045)^4 / 1.13 + $2.65 x (1.045)^ 5/ 1.13^2+ ($2.65 x (1.045)^6 +$55.48) / 1.13^3

P3= $46.28

P0= $2.65 x (1.045) / 1.15 + $2.65 x (1.045)^ 2/ (1.15)^2+ $2.65 x (1.045)^3 / (1.15)^3+ $46.28 / (1.15)^3

P0= $37.01 is the current stock price.

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