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i don understand how to calculate the market capitalisation by using the p/e ratio, someone can help me for this example?? And i am very confuse that the answer using the percentage (60%, 70% and 50%), why it used this percentage, is it estimated??
The earnings of company ove the past five years have been as follows:
20×0 $50,000 20×1 $72,000 20×2 $68,000 20×3 $71,000 20×4 $75,000
The average P/E ratio of quoted companies in industry is 10. Quoted company which are similar in many respect are:
a. Bumblebee, which has P/E ratio of 15, but is a companies with very good growthb.Wasp, which had poor profit record for several years and a P/E ratio of 7.
What was suitable range of valuation for the company?The answer is that company is an unquoted company and therefore more risky, a lower P/E ratio might be more appropriate: 60% to 70% of 10= 6 or 7, or as low as 50% of 10 =5 , so the range between $525,000(7 x $75,000) and $ 357,500(5x $71,500).
hopes can help me solve the problem….thanks very much…
The basic reason that privately held companies are valued lower in P/E terms is the lack of liquidity offered. In other words it is not as easy to sell shares in private companies as it is to sell shares in public ones (especially those quoted on major stock exchanges) and thereby realise some of the investment in cash if needed.In addition private companies are seen as riskier than public companies of similar size operating in similar markets. Part of the reason for this is that public companies have to publicly declare more information about their financial and business activities and risks than private companies. This is especially the case with companies quoted on major exchanges such as the London Stock Exchange (LSE) and the NYSE where companies must fulfill a range of requirements to meet the listing requirements of these exchanges related to ,for example, disclosure of information about general operations and corporate governance requirements. As a result public companies are thought to be less risky than private companies all other things being equal and therefore are valued more highly in relation to earnings. The percentage reduction of 50-70 percent that you quote is simply a guess as to discount reduction in P/E as a result of the above factors.Ultimately a company is worth the amount for which someone wishing to buy it is willing to pay.I hope what I have written was useful to you and if you have any additional questions or queries do not hesitate to ask.
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