Question #100
Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples
PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf
Page: 34
Status: Unattempted
Correct Answer: B
Question
An increase in profit margin will cause a price-to-sales (P/S) multiple to increase if:
Answer Choices:
A. there is insufficient information to tell
B. the growth rate in sales does not decrease proportionately
C. the required rate of return increases
Explanation
An increase (decrease) in the profit margin increases (decreases) the growth rate if sales
do not decrease (increase) proportionately. Increases in the required rate of return would
decrease the P/S ratio. This is clear in the expression for trailing P/S:
P0 / S0 = [(E0 / S0)(1 – b)(1 + g)] / (r – g)