You are analyzing the apparel business and have separated the firms in the business broadly into brand name and generic companies. While you believe that both groups are in stable growth, growing 3% a year and have the same cost of capital and sales to invested capital ratio, the generic companies are trading at an EV/Sales ratio of 0.60 whereas the brand name companies are trading at an EV/Sales ratio of 1.40.

a) If the generic companies are fairly priced and expect to have an after-tax operating margin of 4% next year and have a sales-to-capital ratio of 3.0, estimate the cost of capital for these companies. b) Now assume that brand name companies have the same cost of capital and sales to capital ratio as the generic companies and are also fairly priced. Estimate the after-tax operating margin for brand name companies. c) Finally, assume that brand name companies are considering cutting prices by 10. If this will result in an operating margin of 6%, but increase sales by 15% (holding capital constant), what effect will this have on the EV/Sales ratio of brand name companies?