ExpertEasy2 marksMultiple Choice
ACCA · Question 11 · Business Valuations
Section A
Quantum Logistics is a privately held service firm. Its owners wish to value the company using the Price/Earnings (P/E) ratio method. A suitable listed proxy company has an earnings yield of 8%.
Quantum Logistics recently reported an Earnings Per Share (EPS) of $0.40.
Using the proxy company's data, what is the estimated share price of Quantum Logistics?
Section A
Quantum Logistics is a privately held service firm. Its owners wish to value the company using the Price/Earnings (P/E) ratio method. A suitable listed proxy company has an earnings yield of 8%.
Quantum Logistics recently reported an Earnings Per Share (EPS) of $0.40.
Using the proxy company's data, what is the estimated share price of Quantum Logistics?
Answer options:
A.
$3.20
B.
$4.00
C.
$5.00
D.
$8.00
How to approach this question
First, convert the earnings yield into a P/E ratio by taking its reciprocal (1 / Earnings Yield). Then, multiply the resulting P/E ratio by the EPS to find the share price.
Full Answer
C.$5.00✓ Correct
The earnings yield is the reciprocal of the P/E ratio.
P/E ratio = 1 / 0.08 = 12.5.
The valuation formula using P/E is: Share Price = EPS × P/E ratio.
Share Price = $0.40 × 12.5 = $5.00.
Common mistakes
Multiplying the EPS directly by the earnings yield ($0.40 * 0.08 = $0.032).
Practice the full ACCA FM — Financial Management Practice Exam 5
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