Explanation

To calculate the justified price-to-sales (P/S) ratio, we use the formula:

$P/S = \frac{E_0}{S_0} \times \frac{(1 - b)(1 + g)}{r - g}$

Where:

• $E_0/S_0$ = Profit margin = 10% = 0.10
• $b$ = Retention rate = 40% = 0.40
• $g$ = Growth rate = 5% = 0.05
• $r$ = Required rate of return = 15% = 0.15

First, calculate the dividend payout ratio: $1 - b = 1 - 0.40 = 0.60$

Now substitute into the formula: $P/S = 0.10 \times \frac{0.60 \times (1 + 0.05)}{0.15 - 0.05}$ $P/S = 0.10 \times \frac{0.60 \times 1.05}{0.10}$ $P/S = 0.10 \times \frac{0.63}{0.10}$ $P/S = 0.10 \times 6.3 = 0.63$

The justified P/S ratio is approximately 0.63, which is closest to 0.67 among the given options.

Note: The WACC of 14% is not used in this calculation as the required rate of return is given as 15%.