Longs Drug Stores, a large US drugstore chain operating primarily in Northern California, had sales per share of $135 in 1993, on which it reported earnings per share of $2.80 and paid a dividend of $1.20 per share. The company is expected to grow 4% in the long term, and has a beta of 0.8. Assume a T-bond rate of 3.25% and an equity risk premium of 5.5%.

1. Estimate a theoretical price/sales ratio.
2. If the stock currently trades at $40, what profit margin would justify the stock price?