World Wide Web Wares (4W, for short) is an online retailer of small kitchen appliances and utensils. The firm has been around for a few years and has created a nice market niche for itself. In fact, it actually turned a profit last year, albeit a fairly small one. After doing some basic research on the company, you’ve decided to take a closer look. You plan to use the price-to-sales ratio to value the stock, and you have collected P/S multiples on the following Internet retailer stocks:
Company ............. P/S Multiples
Amazing.com ........... 4.5
ReallyCooking.com .......... 4.1
Fixtures & Appliances Online ..... 3.8
Find the average P/S ratio for these 3 firms. Given that 4W is expected to generate $40 million in sales next year and will have 10 million shares of stock outstanding, use the average P/S ratio you computed above to put a value on 4W’s stock.