Question 1

'RetroWear', an unlisted e-commerce vintage clothing retailer, generated earnings of $400,000 last year. A similar listed company, 'VintageStyle PLC', has a Price/Earnings (P/E) ratio of 15. RetroWear's directors believe a 20% discount should be applied to the P/E ratio due to RetroWear being unlisted.

What is the estimated valuation of RetroWear using the adjusted P/E ratio method?

Accepted Answer

First, adjust the proxy P/E ratio by applying the discount. Then multiply the adjusted P/E ratio by the company's earnings.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to apply the discount and choosing $6m, or applying a premium instead.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 3

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