Suppose that Drug Tree has identified three comparable companies relative to a target under evaluation. The valuation metric is price to sales (P/S). The three comparable companies have P/S ratios of 2.17, 1.98, and 2.09. The target has sales of €600m. What value of the P/S should be applied to the target, and what is the estimated value?
A. B. C.
The appropriate value to apply to the target is the average, or P/S = 2.08. If sales = €600m then solving for P = 2.08 × €600m yields an estimated target value of €1248m
