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:

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

Answer 1

Most accurate option is

c) A history of developing its own patents.

Explanation: Patents are developed as with respect to market capitalization and not to the book value, thus in that case analyst will consider price to market, as patents will play an important role in value of business, current value of business will depend upon market rates. In case of option b) Grown primarily through acquisitions – price to market will only be used at the time of acquisitions but not at the present situation where analysis is done for general purpose. Adding to this Option a) is completely invalid as has no relation to the given ratios.