Longs Drug Stores, 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%, and the market risk premium is 5.5%.

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?