You are researching XMI Corporation (XMI). XMI has shown steady earnings - per - share growth (18 percent a year during the past seven years) and trades at a very high multiple to earnings (its P/E is currently 40 percent above the average P/E for a group of the most comparable stocks). XMI has generally grown through acquisition, by using XMI stock to purchase other companies whose stock traded at lower P/Es. In investigating the financial disclosures of these acquired companies and talking to industry contacts, you conclude that XMI has been forcing the companies it acquires to accelerate the payment of expenses before the acquisition deals are closed. As one example, XMI asks acquired companies to immediately pay all pending accounts payable, whether or not they are due. Subsequent to the acquisition, XMI reinstitutes normal expense payment patterns.
A. What are the effects of XMI’s preacquisition expensing policies?
B. The statement is made that XMI’s “P/E is currently 40 percent above the average P/E for a group of the most comparable stocks. ” What type of valuation model is implicit in that statement?