David MTQ

David is a fund manager within M inc , a global investment company. He has recently identified the following potential acquisition targets

Company A is an unquoted, property development company with a portfolio of over 200 houses at various stages of renovation. It has been loss making for last 2 years due to economic downturn. David believes that the new government legislation will bring a welcome boost to the housing market

Company B is an unquoted shoe manufacturer. It has also suffered in the recent recession but the directors are confident that the company is past the worst and growth lies ahead

Earnings are expected to be $12.5 m next year and expected to grow at 2% per annum

Dividends will be $5 m for each of the next 3 years and then expected to grow at 3% thereafter

David has located a similar listed company that has an earning yield of 12% and cost of equity of 14%

Company C is a quoted fashion retailer. David believes that the current share price of $2.58 undervalues the company significantly, making it a suitable target. He is also interested in company C as he feels it would have a good fit with his existing fund portfolio and would diversify away some risk.

Which of the following valuation methods is most suitable for valuing company A

a) P/E ratio x earnings
b)DVM
c)net realisable value of assets
d)Market capitalization

Correct answer is C, but please can you explain me