Question 1

Section A

Meridian Corp is valuing a target company, Zenith Ltd, for a cross-border acquisition. Zenith Ltd recently reported Profit After Tax (Earnings) of $8 million. Meridian Corp has identified a suitable proxy company in the same industry with a Price/Earnings (P/E) ratio of 12. However, because Zenith is unlisted and smaller, Meridian decides to apply a 20% discount to the proxy P/E ratio.

What is the estimated equity value of Zenith Ltd?

Accepted Answer

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

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to apply the discount, leading to option A.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 2

More questions from this exam