ExpertMedium2 marksMultiple Choice
ACCA · Question 14 · Business Valuations
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?
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?
Answer options:
A.
$19.2m
B.
$24.0m
C.
$30.0m
D.
$37.5m
How to approach this question
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.
Full Answer
B.$24.0m✓ Correct
Step 1: Calculate the proxy P/E ratio. P/E = 1 / Earnings Yield = 1 / 0.08 = 12.5.
Step 2: Calculate the base valuation. Value = P/E * Earnings = 12.5 * $2.4m = $30m.
Step 3: Apply the illiquidity discount for being a private company. $30m * (1 - 0.20) = $24.0m.
Common mistakes
Forgetting to apply the illiquidity discount, or multiplying the earnings by the earnings yield instead of dividing.
Practice the full ACCA FM — Financial Management Practice Exam 6
32 questions · hints · full answers · grading
More questions from this exam
Q01Section A
GlobalVax is a non-governmental organization (NGO) dedicated to distributing vaccines ...EasyQ02Section A
QuantumCore, a domestic quantum computing startup, relies heavily on imported rare-ear...MediumQ03Section A
VertiFarm Co operates a network of urban vertical farms. It is experiencing cash flow ...MediumQ04Section A
DeepSea Minerals PLC is evaluating two mutually exclusive underwater extraction machin...MediumQ05Section A
A municipal water desalination plant is seeking to raise capital in compliance with Is...Easy