Question

ABC company is expected to generate post tax earnings of sh 200,000 p.a and
Companies in the same trade will generally have a price earning (P/E) ratio
Of 8. On account of company ABC limited size a ratio of 6 is considered more
Appropriate. The issued share capital is 1,000,000 ordinary shares of sh 50 each
Determine the value of shares and the value of business.

Answer 1

Answer on Question #85377 - Economics – Finance

Question:

ABC company is expected to generate post tax earnings of sh 200,000 p.a and companies in the same trade will generally have a price earning (P/E) ratio of 8. On account of company ABC limited size a ratio of 6 is considered more appropriate. The issued share capital is 1,000,000 ordinary shares of sh 50 each. Determine the value of shares and the value of business.

Answer

Price of share = Earnings per share × (P/E)

Price of share = $\frac{200,000}{1,000,000} \times 6 = 1.2$

To calculate the value of business we will use the multiplier coefficient and total year earnings:

Business value = Multiplier × Annual revenues

Business value = $\frac{6}{8} \times 200,000 = 150,000$

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