ExpertMedium2 marksMultiple Choice
ACCA · Question 11 · Business Valuations
'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?
'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?
Answer options:
A.
$6,000,000
B.
$4,800,000
C.
$5,200,000
D.
$7,200,000
How to approach this question
First, adjust the proxy P/E ratio by applying the discount. Then multiply the adjusted P/E ratio by the company's earnings.
Full Answer
B.$4,800,000✓ Correct
1. Proxy P/E ratio = 15.
2. Apply 20% discount for lack of marketability (unlisted status): 15 × (1 - 0.20) = 12.
3. Valuation = Adjusted P/E × Earnings = 12 × $400,000 = $4,800,000.
Common mistakes
Forgetting to apply the discount and choosing $6m, or applying a premium instead.
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