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6.50%

The average debt/equity ratio of these firms is 20%, and the tax rate is 40%.

a. Estimate the average price/book value ratio for these comparable firms. Would you use this average P/BV ratio to price the initial public offering.

b. What subjective adjustments would you make to the price/book value ratio for this firm and why?

18. Longs Drug, a large U.S. drugstore chain operating primarily in Northern California, had sales per share of $122 in 1993, on which it reported earnings per share of $2.45 and paid a dividend per share of $1.12. The company is expected to grow 6% in the long term, and has a beta of 0.90. The current T.Bond rate is 7%.

a. Estimate the appropriate price/sales multiple for Longs Drug.

b. The stock is currently trading for $34 per share. Assuming the growth rate is estimated correctly, what would the profit margin need to be to justify this price per share.

19. You have been asked to assess whether Walgreen Company, a drugstore chain, is correctly priced relative to its competitors in the drugstore industry at the end of 1993.

The following are the price/sales ratios, profit margins, and other relative details of the firms in the drugstore industry.

Company

P/S Ratio

Profit Margin Payout

Expected Growth

Beta

Arbor Drugs 0.42

3.40%

18%

14.0%

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