Question

TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $1.6 million and there are 122,000 shares outstanding. a. If the benchmark price-sales ratio is 4.2, what is your estimate of an appropriate stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What if the price-sales ratio were 3.6? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer: a. $55.08

b. $49.84

Explanation:

a) We can calculate the price of a stock using the PS ratio, the sales and the number of shares outstanding with the following formula.

Price = PS * Sales / No of Outstanding shares.

Plugging in the numbers would be,

= 4.2 * 1,600,000 / 122,000

= $55.08

$55.08 is the estimate of an appropriate stock price.

b) If the PS ratio were 3.6 then the stock price would be,

= 3.6 * 1,600,000 / 122,000

= 49.8360655738

= $49.84

If the PS ratio were 3.6 then stock price would be $49.84

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