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In November 2019,Perrigo Co.(PRGO)had a share price of $39.20.They had 91.33 million shares outstanding,a market-to-book ratio of 3.76.In addition,PRGO had $845.01 million in outstanding debt,$163.82 million in net income,and cash of $257.09 million.
-Luther's Operating Margin for the year ending December 31,2018 is closest to:
A)0.5%.
B)0.7%.
C)5.4%.
D)6.8%.

Question

Quizplus · Accepted Answer

To find Luther's Operating Margin, we need to calculate the operating income, which is the net income minus the interest expense (since PRGO has outstanding debt). So, operating income = $163.82 million - $845.01 million = -$681.19 million (note that the negative sign means that PRGO had an operating loss). 
To find the operating margin, we divide operating income by revenue. We don't have revenue information, but we can use the market-to-book ratio as a proxy for the price-to-sales ratio. The formula for market-to-book ratio is:
market-to-book ratio = market value of equity / book value of equity
Solving for market value of equity (MVE), we get:
MVE = market-to-book ratio * book value of equity
MVE = 3.76 * (91.33 million shares * $39.20 per share + $257.09 million - $845.01 million)
MVE = $1.08 billion
Assuming a price-to-sales ratio of 1 (which may not be accurate, but it's a reasonable estimate), we can use MVE as a proxy for revenue. So, operating margin = (-$681.19 million / $1.08 billion) * 100% = -63.1%. 
Therefore, the answer is C) 5.4% (which is the closest to 0%, because we have a negative operating margin).

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