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CS Professional · Corporate Restructuring, Valuation and Insolvency · Overview of Business Valuation

Hindustan Gears Ltd, an unlisted engineering company, is being valued using the average price-to-earnings multiple of three listed engineering peers. Its maintainable earnings are Rs 40 crore and the peer average P/E is 12. Which statement is correct?

Equity value is about Rs 480 crore under the market approach. Applying the peer average P/E of 12 to maintainable earnings of Rs 40 crore gives 480, and using comparable company multiples is the market approach.

  1. AEquity value is about Rs 480 crore under the market approachCorrect
  2. BEquity value is about Rs 480 crore under the asset approach
  3. CEquity value is about Rs 3.33 crore under the market approach
  4. DEquity value is about Rs 52 crore under the income approach

Explanation

Using comparable company multiples is the market approach. Equity value = 40 x 12 = Rs 480 crore. Rs 3.33 crore comes from dividing 40 by 12, inverting the multiple.

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