ACCA Applied Skills · Financial Management · Models for the valuation of shares
Orion Co has earnings of $1,500,000 and 3,000,000 shares in issue. A similar listed company trades on a P/E ratio of 12. Orion is unquoted, and the analyst applies a 25% discount to the proxy P/E to reflect lack of marketability. What is the estimated value per share of Orion?
The value is $4.50 per share. EPS is $0.50, and the proxy P/E of 12 is reduced by 25% to 9 for the unquoted status. Multiplying $0.50 by 9 gives $4.50. Ignoring the discount would wrongly give $6.00.
- A$4.50Correct
- B$6.00
- C$9.00
- D$3.75
Explanation
Adjusted P/E = 12 x 0.75 = 9. EPS = 1,500,000/3,000,000 = $0.50. Value per share = 0.50 x 9 = $4.50. Without the discount the answer would be $6.00, which is the key distractor.
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