Tambrands, a leading producer of tampons, reported 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 out 45% 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%.)
a. Estimate the price/sales ratio, based upon 1992 profit margins and expected growth.
b. Estimate the price/sales ratio, based upon 1993 profit margins and expected growth (Assume that the extraordinary growth period remains 5 years, but that the growth rate will be impacted by the lower margins.)