Skip to content

ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques

Dunmore Retail is valued by an analyst using the price-earnings ratio of a listed competitor, Harrow Stores. Dunmore is unlisted, smaller and has more volatile earnings than Harrow. Which approach is most appropriate when applying Harrow's P/E ratio?

The analyst should reduce Harrow's P/E ratio. Dunmore is unlisted, smaller and has more volatile earnings, so its shares are less marketable and riskier. Using the listed competitor's multiple unchanged would overstate Dunmore's value.

  1. AApply Harrow's P/E unchanged, since both are in retail
  2. BAdjust Harrow's P/E downward to reflect Dunmore's lower marketability and higher riskCorrect
  3. CAdjust Harrow's P/E upward because smaller firms grow faster
  4. DUse Harrow's P/E only for the debt component of Dunmore's value

Explanation

A P/E from a listed comparator normally needs discounting for unlisted status, smaller size and higher earnings volatility, as these increase risk and reduce marketability. Applying it unchanged would overstate value. Increasing it is unsupported by the facts.

Did you get it right without looking?

One question tells you little. A timed set on Financial analysis and decision-making techniques shows your real accuracy, how long you take and where you lose marks.

Practise Financial analysis and decision-making techniquesFree diagnostic mock

More Financial analysis and decision-making techniques questions