Question 1

Section A

Titan E-Sports is a private company looking to be acquired. A suitable listed proxy company has an earnings yield of 8%. Titan E-Sports recently reported Profit After Tax of $2.4m. To account for Titan being unlisted and less liquid, the acquirer demands a 20% discount on the valuation.

Using the P/E ratio method, what is the estimated equity value of Titan E-Sports?

Accepted Answer

First, convert the earnings yield into a P/E ratio (P/E = 1 / Earnings Yield). Multiply the P/E ratio by the Profit After Tax to get the base valuation. Finally, reduce this valuation by the 20% illiquidity discount.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to apply the illiquidity discount, or multiplying the earnings by the earnings yield instead of dividing.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

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