ACCA Strategic Professional · Advanced Financial Management · Valuation for acquisitions and mergers
Dalton plc has 8 million shares in issue and earnings after tax of $12 million. A comparable listed company in the same sector trades on a P/E ratio of 11. Using the P/E method, what is the estimated equity value of Dalton plc?
The P/E method values equity as total earnings multiplied by the comparable P/E ratio. Here $12 million multiplied by 11 gives $132 million. Using the number of shares as the multiple, or ignoring the multiple, produces wrong values.
- A$96.0 million
- B$132.0 millionCorrect
- C$1.5 million
- D$12.0 million
Explanation
Equity value = earnings x P/E = $12m x 11 = $132m. The figure of $96.0m wrongly multiplies the EPS ($1.50) by shares and then by 8 only, i.e. it uses the share count as the multiple instead of the P/E ratio. The other options do not apply the multiple at all.
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