This valuation technique breaks a firm's observed P/E down into two components: The P/E, based on the company's ongoing business (its base P/E), plus a franchise P/E the market assigns to the expected value of new and profitable business opportunities. It is known as:
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A. B. C. D.A
The franchise P/E is a function of the relative rate of return on new business opportunities (the franchise factor) and the size of the superior return opportunities
(the growth factor).
The correct answer to the question is A. the franchise factor.
The valuation technique described in the question is known as the franchise factor. It is a method used to assess the value of a firm's ongoing business as well as the value of its potential new and profitable business opportunities.
The franchise factor breaks down the observed price-to-earnings ratio (P/E) of a company into two components. The first component is the base P/E, which represents the valuation multiple applied to the company's ongoing or existing business. This base P/E reflects the market's perception of the company's current operations, profitability, risk, and growth prospects.
The second component is the franchise P/E, which represents the additional valuation multiple assigned to the expected value of new and profitable business opportunities. This component reflects the market's perception of the company's ability to generate future growth and capture profitable opportunities beyond its existing business.
By combining the base P/E and the franchise P/E, investors and analysts can estimate the overall valuation of a company, considering both its ongoing operations and its growth potential. This approach recognizes that a company with promising growth opportunities may be assigned a higher P/E multiple than a similar company without such prospects.
Option A, the franchise factor, accurately describes this valuation technique, making it the correct answer to the question. Option B, market value-added, refers to a different concept that measures the increase in a firm's market value resulting from its investment decisions. Option C, economic value-added, is a measure of a company's profitability that assesses the value generated by its operations after considering the cost of capital. Therefore, options B and C are not relevant to the valuation technique described in the question. Option D, none of these answers, is incorrect as option A, the franchise factor, is the appropriate choice.