ExpertMedium2 marksMultiple Choice
ACCA · Question 07 · Business Valuations
Section A
Meridian Corp is valuing a target company, Zenith Ltd, for a cross-border acquisition. Zenith Ltd recently reported Profit After Tax (Earnings) of $8 million. Meridian Corp has identified a suitable proxy company in the same industry with a Price/Earnings (P/E) ratio of 12. However, because Zenith is unlisted and smaller, Meridian decides to apply a 20% discount to the proxy P/E ratio.
What is the estimated equity value of Zenith Ltd?
Section A
Meridian Corp is valuing a target company, Zenith Ltd, for a cross-border acquisition. Zenith Ltd recently reported Profit After Tax (Earnings) of $8 million. Meridian Corp has identified a suitable proxy company in the same industry with a Price/Earnings (P/E) ratio of 12. However, because Zenith is unlisted and smaller, Meridian decides to apply a 20% discount to the proxy P/E ratio.
What is the estimated equity value of Zenith Ltd?
Answer options:
A.
$96.0 million
B.
$76.8 million
C.
$19.2 million
D.
$80.0 million
How to approach this question
First, adjust the proxy P/E ratio by applying the discount. Then, multiply the target's earnings by the adjusted P/E ratio.
Full Answer
B.$76.8 million✓ Correct
When valuing an unlisted company using a listed proxy, a discount is often applied to reflect lower liquidity and higher risk.
Adjusted P/E ratio = 12 * (1 - 0.20) = 9.6.
Equity Value = Earnings * P/E ratio = $8,000,000 * 9.6 = $76,800,000.
Common mistakes
Forgetting to apply the discount, leading to option A.
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