Question

An analyst is reviewing a company that prepares its financial statements according to US GAAP. He will consider the ratio of price-to-market value more appropriate than the ratio of price-to-book value if the company has:

Question 8 options:

	A. a history of developing its own patents.
	B. plans to make substantial capital expenditures.
	C. grown primarily through acquisitions.

Answer 1

The market value of a patent is far more than the cost incurred to develop it. If a company has a history of developing its own patents, then analyzing the company by the book value of assets won't present a correct picture of company because the assets at book value would be less valued than their market value.

So, in case a company has a history of developing its own patents, the ratio of price-to-market value shall be more appropriate than the ratio of price-to-book value.

Hence, the correct answer is A. a history of developing its own patents.