ExpertMedium2 marksMultiple Choice
ACCA · Question 13 · Business Valuations
Section A
PixelPlay is an unquoted esports franchise generating an annual post-tax profit (earnings) of $2.5 million. A comparable publicly traded esports company, MetaGaming PLC, has a Price/Earnings (P/E) ratio of 14.
Due to PixelPlay being unquoted and less liquid, an acquirer applies a 20% discount to the P/E multiple.
What is the estimated equity value of PixelPlay?
Section A
PixelPlay is an unquoted esports franchise generating an annual post-tax profit (earnings) of $2.5 million. A comparable publicly traded esports company, MetaGaming PLC, has a Price/Earnings (P/E) ratio of 14.
Due to PixelPlay being unquoted and less liquid, an acquirer applies a 20% discount to the P/E multiple.
What is the estimated equity value of PixelPlay?
Answer options:
A.
$35.0 million
B.
$28.0 million
C.
$30.0 million
D.
$7.0 million
How to approach this question
Step 1: Adjust the proxy P/E ratio downwards by the illiquidity discount. Step 2: Multiply the adjusted P/E ratio by the company's earnings.
Full Answer
B.$28.0 million✓ Correct
When valuing an unquoted company using a quoted proxy, a discount is typically applied to reflect the lack of marketability/liquidity.
Proxy P/E = 14.
Discounted P/E = 14 * 80% = 11.2.
Value = Earnings * Adjusted P/E = $2.5m * 11.2 = $28.0 million.
Common mistakes
Forgetting to apply the 20% discount, leading to the unadjusted value of $35m.
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