The directors of a unlisted manufacturing company have prepared a valuation of their company using...

CIMA F3 Question Answer

The directors of a unlisted manufacturing company have prepared a valuation of their company using the price-earning method.

Their calculation is:

Value if the company‘s equity = $6 million x 10 =$60 million where.

$6 million is the company’s reported profit before interested and tax in the most recent accounting period and

10 is the average price-earnings ratio for all listed companies

Which THREE of the following are weakness of this valuation?

The equity result needs to be uplifted in recognition that this is an unlisted company.

The price-earnings valuation method gives a value for the entire entity not Just a value of the equity.

A forecast of sustainable profit should have been used instead of a historical figure

Profit after tax should have been used in the calculation instead of profit before interest and tax.

The price-earnings ratio should have been an average for companies in the same industry sector rather than alI listed companies

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