Question 1

**Section A**

Retail giant ShopSmart is looking to acquire a smaller competitor, QuickMart. QuickMart recently reported earnings of $2.5 million. ShopSmart has a Price/Earnings (P/E) ratio of 12, while the average P/E ratio for unlisted companies in the retail sector is 8. QuickMart is an unlisted company.

Using the P/E ratio method, what is the most appropriate valuation for QuickMart?

Accepted Answer

Multiply the target company's earnings by the appropriate P/E ratio. For an unlisted target, use the P/E ratio of similar unlisted companies, or a discounted listed sector average.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using the acquiring company's P/E ratio, which fails to account for the lack of marketability (liquidity discount) of the unlisted target.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 4

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