Acquire Corp. has a business model based on making accretive acquisitions each year. The company has historically been successful in implementing its strategy. Earnings per share have grown each of the last five years at a 15% compounded rate. During the past year, Acquire Corp. acquired a services company with large net operating losses, representing a third leg to its business model. The other two business segments are engineering construction and mining. The purchase price was one-half the company's current market value. The most appropriate technique to value Acquire Corp. is based on its:
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A. B. C.B
To value Acquire Corp., we need to consider its unique business model and recent acquisition. The company has a strategy of making accretive acquisitions each year, and its earnings per share have grown at a compounded rate of 15% over the past five years. Additionally, Acquire Corp. recently acquired a services company with significant net operating losses.
Given this information, let's evaluate the options provided:
A. Price-to-book value ratio: This ratio compares a company's stock price to its book value per share, which is the value of its assets minus its liabilities divided by the number of outstanding shares. The price-to-book value ratio is commonly used to assess the valuation of companies with tangible assets. However, since Acquire Corp.'s business model is based on acquisitions and its recent acquisition involved a services company with net operating losses, the book value may not be an accurate reflection of its value. Therefore, this ratio may not be the most appropriate technique to value Acquire Corp.
B. Forward price-to-earnings ratio: The forward price-to-earnings (P/E) ratio is a valuation metric that compares a company's stock price to its estimated future earnings per share. It is frequently used to assess the relative value of a company's shares. In Acquire Corp.'s case, the statement mentions that its earnings per share have grown at a compounded rate of 15% over the past five years, indicating a positive growth trend. Considering the company's focus on making accretive acquisitions and the potential synergies from the recent acquisition of a services company, the forward P/E ratio could be a suitable technique to value Acquire Corp.
C. Trailing price-to-sales ratio: The trailing price-to-sales (P/S) ratio compares a company's stock price to its revenue per share. It is commonly used to evaluate companies with substantial sales but low or negative earnings. Acquire Corp.'s recent acquisition of a services company with large net operating losses suggests that the company may have low or negative earnings in the near term. In this case, using the trailing P/S ratio might be a better approach to assess its value, as it focuses on revenue rather than earnings.
Considering the information provided, the most appropriate technique to value Acquire Corp. would likely be the forward price-to-earnings (P/E) ratio (Option B). This method takes into account the company's historical earnings growth, its strategy of making accretive acquisitions, and the potential future earnings from the recent acquisition.
Please note that this response is based on the information provided in the question, and in real-world scenarios, additional factors and analysis would be required to determine the most appropriate valuation technique for a specific company.