InIllustration8.1,weassume thatthefirmmaintainsanet
marginof 10 percentandhasasales-to-bookequityratioof2,
thusallowingustohaveareturnonequityof 20 percent.In
Table 8.10, we examine the impact of changing the net
margin while keeping the expected growth rate and
sales-to-bookequityratiofixed.Inotherwords,ifthemargin
dropsto 5 percent, weassume thattheretentionratio will
havetochangetoallowthefirmtogrowat 18 percentforthe
high-growth period.
TABLE 8.10Net Margin and Equity Multiples
As the net margin increases, all of the equity multiples
increase. Since net margin is the companion variable for
price-to-salesratios,weexaminetheimpactofchangingthe
margin on price-to-sales ratios inFigure 8.8.
FIGURE 8.8Price-to-Sales Ratios versus Net Margin