TwitterMe, Inc., is a new company and currently has negative earnings. The compa

Question

TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $2.7 million and there are 144,000 shares outstanding.

If the benchmark price–sales ratio is 6.4, 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.)

What if the price–sales ratio were 5.7? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $2.7 million and there are 144,000 shares outstanding.

Explanation / Answer

Price to Sales Ratio = Market Cap / Sales

Market Cap = Price per share x Number of shares outstanding

Stock Price, when price to sales ratio is 6.4:

6.4 = Market Cap / Sales
=> Market Cap = 6.4 x $2,700,000 = $17,280,000

Price per share = $17,280,000 / 144,000 = $120

Stock Price, when price to sales ratio is 5.7:

5.7 = Market Cap / Sales
=> Market Cap = 5.7 x $2,700,000 = $15,390,000

Price per share = $15,390,000 / 144,000 = $106.88

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