ACCA Strategic Professional · Advanced Financial Management · Valuation for acquisitions and mergers
Hale plc plans to acquire Brin Ltd, an unlisted company with annual earnings of $5.0 million. The average P/E of comparable listed companies is 14. Because Brin is unlisted and illiquid, Hale's advisers apply a 25% discount to the listed P/E. What value does this give for Brin's equity?
Reduce the comparable P/E of 14 by 25% to 10.5 to reflect Brin's lack of marketability, then multiply by earnings of $5.0 million. This gives $52.5 million. Ignoring the discount gives $70 million, and adding rather than deducting overstates value.
- A$52.5 millionCorrect
- B$70.0 million
- C$87.5 million
- D$93.3 million
Explanation
Adjusted P/E = 14 x (1 - 0.25) = 10.5. Equity value = $5.0m x 10.5 = $52.5m. Option B ignores the discount. Option C wrongly adds 25% (14 x 1.25 = 17.5). Option D divides by 0.75 instead of multiplying.
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