| Margin and Sales Trade-off for CVR, Inc. and Home, Inc., for Next Year |
| Firm |
Strategy |
Retention Rate |
Profit Margin |
Sales/Book Value of Equity |
| CVR, Inc. |
High Margin / Low Volume |
20% |
8% |
1.25 |
| CVR, Inc. |
Low Margin / High Volume |
20% |
2% |
4.00 |
| Home, Inc. |
High Margin / Low Volume |
40% |
9% |
2.00 |
| Home, Inc. |
Low Margin / High Volume |
40% |
1% |
20.0 |
(Note: CVR, Inc., has a book value of equity of $80 and a required rate of return of 10%. Home, Inc., has a book value of equity of $100 and a required rate of return of 11%.)
If CVR, Inc., has a required return for shareholders of 10%, what is its appropriate leading price-to-sales (P/S) multiple if the firm undertakes the high margin/low volume strategy?
A. 1.46.
B. 0.20.
C. 0.80.
|
