ACCA Strategic Professional · Advanced Financial Management · Valuation for acquisitions and mergers
Gorse Co is valuing a target using the P/E method. Gorse's P/E is 14 and the target's earnings are $6m. The target's own sector P/E is 10. Gorse believes it can make the target's earnings be valued on Gorse's P/E after acquisition. Based on these facts, what is the value of the target if valued using the sector P/E, and the additional value implied by using Gorse's P/E?
The target is worth $60m at the sector P/E of 10 on earnings of $6m. Using Gorse's P/E of 14 gives $84m, so the additional implied value is $24m. Such a gain is only realistic if the target's risk and growth are truly re-rated.
- A$60m and additional $24mCorrect
- B$84m and additional $24m
- C$60m and additional $36m
- D$84m and additional $60m
Explanation
Sector value = 6 x 10 = $60m. Value at Gorse's P/E = 6 x 14 = $84m. Additional value = 84 - 60 = $24m.
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