Question
Newco is a young company that has yet to make a profit. You are trying to place a value on the stock, but it pays
Newco is a young company that has yet to make a profit. You are trying to place a value on the stock, but it pays no dividends and you obviously cannot calculate a P/E ratio. As a result, you decide to look at other stocks in the same industry as Newco to see if you can find a way to value this company. You find the following information:
Per-Share Data
Newco Adolescentco Middle-Ageco Oldco
Sales $10 $200 $800 $800
Profit $10 $10 $60 $80
Book value $2 $2 $5 $8
Market value ? $20 $80 $75
Estimate a market value for Newco. Discuss how your estimate could change if Newco was expected to grow much faster than the other companies.
Which of the following statements about the estimate of Newco's market value is correct? (Select the best choice below.)
A.
Based on the price-to-sales ratio, the market value of Newco is estimated to be about $1.00, which then should be adjusted upward for the additional growth potential.
B.
Based on the price-to-earnings, the market value of Newco is estimated to be about $15.00, which then should be adjusted downward for the additional growth potential.
C.
Based on the market value of competitors, the market value of Newco is estimated to be about $55.00, which then should be adjusted upward for the additional growth potential.
D.
Based on the price-to-book-value ratio, the market value of Newco is estimated to be about $12.00, which then should be adjusted downward for the additional growth potential.
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