Problem:
You are analyzing a stock for inclusion in your portfolio. You are valuing it based the worth of its peers and you believe P/S and net profit margin are the best indicators for valuation. Your firm has the same risk, payout ratio, and growth profile as a peer group of companies; however, you expect it to have a net profit margin of 8% and the peers have a net profit margin of 12%.
Required:
Question: If the peers have a P/S ratio of 3.00, what is the fair value P/S ratio for the stock you are considering?
a) 0.67
b) 1.00
c) 2.00
d) 3.00
e) 5.00
Note: Please show the work not just the answer.