Business Valuations

Hi Sir

If we’re asked to calculate a valuation on a P/E ratio basis and we’re given the most recent PAT and forecasted PAT too, which figure would we base our valuation on: most recent or the latest in the series of PAT forecasts?

I’m not sure if this is a separate point, but in a past paper (Rochie Co, June 2012) we have to use the dividend growth model to calculate the company value, but the constant growth rate does not occur until one of the later forecast values and so we use the use the latest forecasted dividends value and I was wondering that if we were then asked for a comparative valuation based on the P/E ratio, whether we would need to use the PAT from the same forecasted year so that we’re comparing like with like (in terms of the time period from which the valuation is based)?

If we’re given a range of valuation measures for a business and there’s both a ‘replacement cost/cost of setting up equivalent venture’ and ‘present value of future earnings’ – would the investor pay a max of the replacement cost or a max of the present value of future earnings? My revision guide says ‘cost of setting up equivalent venture’ (which was a lower valuation than the PV of future earnings in this particular question). Does this mean that when there’s a valuation for replacement cost and for PV of future earnings, the buyer, to maximise their potential returns will pay a maximum of the lower of the two, but if there’s no ‘replacement cost’ quoted then they’d pay up to the PV of future earnings?

Thank you.