Walgreen, a large retail drugstore chain in the United States, reported a net income of $221 million in 1993 on revenues of $8,298 million. It paid out 31% of its earnings as dividends, a payout ratio it was expected to maintain between 1994 and 1998, during which period earnings growth was expected to be 13.5%. After 1998, earnings growth was expected to decline to 6%, and the dividend payout ratio was expected to increase to 60%. The beta was 1.15 and was expected to remain unchanged. The Treasury bond rate was 7%, and the risk premium was 5.5%.

a. Estimate the price/sales ratio for Walgreens during 1994-1998 and after 1998, assuming its profit margin remains unchanged at 1993 levels.

b. How much of this price/sales ratio can be attributed to extraordinary growth?

Answer rating: 100% (QA)

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